Why ANZ shares are this broker's 'top pick in the sector'

This could be the big four bank to add to your portfolio right now…

Key points
  • ANZ shares have been named as the top pick in the banking sector by Citi
  • The broker believes ANZ is performing ahead of expectations in FY 2023
  • It sees major upside potential and a big dividend yield over the next 12 months

If you're looking for exposure to the banking sector, then ANZ Group Holdings Ltd (ASX: ANZ) shares could be the way to do it.

That's the view of analysts at Citi, which have named the banking giant as its top pick in the sector.

Its analysts recently responded to the bank's first quarter update by retaining their buy rating and $29.25 price target on its shares.

Based on the latest ANZ share price of $24.77, this implies potential upside of 18% for investors over the next 12 months.

And with the broker expecting a $1.66 per share fully franked dividend in FY 2023, which would yield 6.7%, the total potential return on offer with ANZ shares stretches to almost 25%.

A man holding a cup of coffee puts his thumb up and smiles with a laptop open.

Image source: Getty Images

Why is the broker bullish on ANZ shares?

Citi was pleased with ANZ's performance in the first quarter and particularly the strong trends it is exhibiting in lending growth and asset quality.

And while no earnings data was provided, the broker believes that the update suggests that the bank's earnings are trending ahead of expectations. The broker commented:

ANZ's 1Q23 disclosures exhibited strong trends in both lending growth and asset quality. No earnings disclosure was provided, but we think that after backing out RWA movements from capital, it comfortably implies above market earnings, although subject to movements in deductions/reserves.

Asset quality is set to be the key focus of today's release, with an $83m provision release in the quarter driven by largely unchanged CP and a $101m IP release. Despite fears of deteriorating asset quality, impaired assets declined again in the quarter, although this could be the bottom as seasonally mortgages and personal credit arrears tick higher in the March quarter. Institutional lending momentum continued and accelerated in the Dec qtr, which we expect was driven by more available liquidity and pricing vs debt markets.

All in all, the broker believes this makes ANZ shares the best option for investors in the sector right now. It concludes:

ANZ remains our top pick in the sector, and we expect the lending momentum, particularly in institutional, to continue to differentiate vs peers.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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