Why ANZ shares could be the worst pick among banking peers right now

There could be a number of potential headwinds on the bank's horizon.

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ANZ Group Holdings Ltd (ASX: ANZ) shares have underperformed the broader ASX banking sector over the past year.

Whereas the S&P/ASX 200 Banks Index (ASX: XBK) has lifted more than 42% in the past 12 months, ANZ shares are up 25%. This is an underperformance of 17%.

And this trend could continue if one top broker's projections turn out to be correct. Analysts at Morgan Stanley expect weaker earnings from ANZ compared to its banking peers when it reports its annual numbers next month.

Let's dive in.

Broker sees weakness for ANZ shares

Morgan Stanley's latest note on ANZ points to a number of potential headwinds on the bank's horizon.

The broker suspects that ANZ's revenue growth and operating margins to be critical areas of focus in its annual results, due the first week of November.

The "key focus", it says, is the "key drivers, the margin ex markets and divisional outcomes", according to The Australian.

We hope for an update on ANZ Plus, including more detail on plans to migrate ANZ Classic and Suncorp Bank customers. 

We expect more detail on the Suncorp Bank synergies and ANZ's response to APRA's non-financial risk management concerns.

Morgan Stanley also expects a marginal 2% rise in net interest income (NII) but predicts a dip in margins to 1.55%.

It sees the downward pressure stemming from declining mortgages and higher deposit costs – factors that reduce NII.

The analysts also foresee no surprises in the bank's dividend payout, suggesting it might stay "above the target" range without any increase to its current share buyback. This could impact ANZ shares.

Bond trading scandal

Adding to ANZ's hurdles is the ongoing bond trading investigation by the Australian Securities and Investments Commission (ASIC).

As my colleague Tristan reported, the investigation centres on whether ANZ manipulated the market during a $14 billion bond deal for the Australian Federal Government.

The fallout has already seen ANZ excluded from two major debt sales worth $15 billion, including a $7 billion green bond.

As a result of the fallout, the bank is said to be conducting its own internal reviews into the matter. This has already led to the departure of three bond traders.

Broker opinions are mixed too. For instance, consensus rates ANZ shares a hold, according to CommSec.

But UBS, for instance, rated the stock a buy toward the end of September, stating its capital position was strong even when considering buybacks and dividends.

It also sees ANZ booking profits of $7.3 billion this year, valuing the stock at $32 apiece. This is more or less in line with where it trades at the time of writing.

Foolish takeaway

ANZ shares have seen strong gains in 2024. However, potential headwinds could make them a risky choice for the months ahead.

That's what Morgan Stanley analysts say in their most recent note on the stock. Time will tell if the projections are correct or not.

In the past year, ANZ has lifted 25% into the green.

Motley Fool contributor Zach Bristow 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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