The Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price fell just over 13% in 2022. But can the ASX bank share turn things around in 2023?
It significantly underperformed the S&P/ASX 200 Index (ASX: XJO) which dropped by around 7%.
Indeed, it also underperformed compared to the other big banks, Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), and Westpac Banking Corp (ASX: WBC).
What went wrong in 2022?
I'm not sure that anything went particularly wrong last year. But, there were a few elements that could have caused concern.
In mid-2022, when interest rate rises started picking up, investors may have become concerned about how the bank's loan book was going to perform in a rapidly-rising interest rate environment. Would it lead to higher arrears and bad debts?
How the bank performed in its FY22 result could also have been a factor.
In the 12 months to 30 September 2022, it reported that statutory net profit after tax (NPAT) rose by 16% to $7.1 billion. That's a strong growth number.
However, the bank said that its core underlying profit actually went backwards. Its continuing operations cash profit before credit impairments, tax and large/notable items fell 3% to $9.1 billion.
But the ANZ board did decide to grow the annual dividend per share by 3% to $1.46.
It also said that its total gross loans and advances (GLAs) increased by 7% to $676 billion. The ANZ CEO Shayne Elliott explained that it has restored momentum with its Australian home loans with application approval times "back in line with industry peers".
Another factor that could have impacted the ANZ share price in 2022 was the announcement of the proposed acquisition of the banking division of Suncorp Group Ltd (ASX: SUN). ANZ says that this deal will add scale and allow it to challenge the other major banks more effectively.
However, it's possible that the deal may not be a great move, particularly if the bank focuses on integrating the Suncorp banking division rather than improving its current operations.
Could 2023 be better?
For ANZ shares in 2023, the biggest boost could be the higher interest rates.
A key part of a bank making profit is the net interest margin (NIM). The NIM is the profit margin that the bank makes on its lending compared to the cost of that funding, such as savings accounts and term deposits.
If a saver had $100,000 in a term deposit with a rate of 3%, and $100,000 was lent with a loan rate of 5%, the NIM would be 2%.
The NIM can increase in a rising interest rate environment because the banks are passing on rate increases to borrowers faster than to savers.
In its FY22 result, ANZ said:
We expect the environment will continue to be supportive for margins in the first half, although any change from the exit margin is likely to be more modest.
ANZ indicated that in FY23, it could earn an additional net interest income of $1.5 billion and then in FY25, it could generate $3.2 billion of extra net interest income.
If profit goes higher, investors could decide that the ANZ share price is worth more, along with potentially higher dividends.
Valuation
According to Commsec, the ANZ share price is valued at 10 times FY23's estimated earnings with a potential grossed-up dividend yield of 9.3%.
At this price, ANZ looks cheap and offers a big yield. With higher lending profit expected, it could be worth looking at, though it'd be wise to think about how the planned Suncorp deal and, possibly, higher loan arrears could affect things.
