The Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price is seesawing today and is currently up 0.49% at $26.66.
ANZ shares are trailing the S&P/ASX 200 Financials Index (ASX: XFJ), which is up 1.28%. This continues a sharp downturn in the ANZ share price that began in mid-January.
In that time, ANZ shares have collapsed from a high of $28.75 and are now trading at 6-month lows.
Despite the recent pullback, the team at JP Morgan upgraded its recommendation on the ANZ share price from neutral to overweight in a note last week.
The firm has been constructive on ANZ for some time. However, it now has "more confidence in the near term" given a series of factors in the bank's growth engine. Let's take a look.
JP Morgan upgrades ANZ to overweight from neutral
The broker pulled the trigger on its conviction last week amid a shifting macroeconomic narrative in both Australia and New Zealand, particularly concerning interest rates.
While it reckons the other majors will suffer a compression to their net interest margins (NIM), it says ANZ will receive NIM support from "likely further rate rises in New Zealand" and the likelihood of several rate hikes in the US.
If the RBA is slower to the interest rate party, and lifts base rates at a slower pace versus other jurisdictions, this could bode well for the ANZ share price, JP Morgan estimates.
"In the event that the RBA is slower to lift rates this could see ANZ outperform peers in early 2022," the broker said.
Furthermore, analysts at the firm now have greater certainty in ANZ's top line, noting the bank also gives investors the best exposure to offshore interest rates.
"ANZ has A$127 billion of Insto deposits in the APEA region, however, most are [term deposits] TDs with short term/on-demand deposits amounting to A$42 billion."
What else did the broker say?
JP Morgan reckons "long-awaited improvements in mortgage processing" are likely to be realised this year. This could potentially improve ANZ's credit growth prospects.
This is important, as mortgage growth has been underwhelming from the bank's end in recent times. Hence the broker thinks this will lead to a gradual improvement in processing efficiencies.
In fact, ANZ has quite a large exposure to business lending as well. This could offer some protection from the "severe short-term pressure on mortgage margins".
Costs are expected to rise this year throughout the sector – something ANZ can't avoid in FY22. However, from FY23 and beyond, ANZ's costings should normalise as investment spending will wind back with capital management, JP Morgan says.
The firm is heavily bullish and values ANZ at $31.50 per share, reflecting the future dividend stream paid to investors and a multiple to FY24 tangible book value estimates.
At the time of writing, this implies a margin of safety of 18%. As such, with this kind of upside potential, ANZ is one of JP Morgan's preferred picks in the ASX banking sector.
ANZ share price snapshot
The chart below shows the performance of ANZ relative to its peers and the ASX Financials benchmark over the last 12 months.
The group mostly tracked together until around August last year. Investors have since split the group, with Westpac Banking Corp (ASX: WBC) leading losses and Macquarie Group Ltd (ASX: MQG) sailing above the top.
ANZ is largely mirroring the sector index and has yet to break away from this level – as with the majority of its peers.
The ANZ share price has held onto gains in this time and is now up around 10% in the past 12 months. This year to date, however, shares are down about 3.5%. They have also fallen more than 4% over the past week.
