From Headwinds to a Storm
Australian banks have been under severe scrutiny over the past year or so and that has intensified in recent months as the ongoing Royal Commission has revealed instances of bad behaviour across the industry. Even so, news that alleged criminal ‘cartel’ charges are being laid against ANZ, Deutsche Bank and Citigroup has sent further shockwaves through the industry and grabbed headlines.
Despite this the impact on ANZ shares yesterday was marginal and has been muted again today. The shares fell approximately 1.5% last Friday. That the impact has been minimal over the past couple of days despite substantial potential penalties suggests that at this early juncture investors are discounting the likelihood of a material negative financial outcome for the bank and/or they view the ANZ valuation as already having ‘priced in’ much the impact.
What’s it all about?
ANZ disclosed last Friday that the Commonwealth Director of Public Prosecutions (CDPP) advised the bank late Thursday that it intended to begin proceedings against it for being knowingly concerned in alleged cartel conduct. This pertained to ANZ’s $2.5 billion capital raising in August 2015. The ANZ news release also stated it understood the CDPP intended to bring proceedings against ANZ Group Treasurer Rick Moscati.
The underwritten Institutional Equity Placement of approximately 80.8 million shares was completed in conjunction with Deutsche Bank, Citigroup and JP Morgan.
The charges allege that ANZ and the investment banks acting as the joint lead managers came “an arrangement or understanding” in relation to the supply of ANZ shares. Approximately 25.5 million shares (worth around $789 million) reportedly failed to be taken up by buyers during the raising. The implication of the case is that the parties concerned worked to minimise the price impact of supplying the shortfall of shares into the market.
It has been reported that ANZ, Deutsche Bank and Citigroup have now been sent court attendance notices, with the first hearing set for 3 July 2018. It is expected to be a largely procedural hearing. The other investment bank involved, JP Morgan, is reportedly co-operating with authorities and understood to have effectively been given immunity.
It is a landmark legal action that carries potentially very stiff penalties. The breach of cartel laws carry a maximum 10-year jail term for individuals found guilty and companies can be fined up to 10% of their turnover, or three times the profit gained from the action. The case will be a complex and technical one.
ANZ has announced its intention to defend itself and its staff, with the ANZ Chief Risk Officer Kevin Corbally saying, “We believe ANZ acted in accordance with the law in relation to the placement and on that basis the bank intends to defend both the company and our employee.” Indeed, all parties deny the allegations and will defend against them.
ANZ is also co-operating with ASIC (Australian Securities and Investments Commission) in relation to the share placement.
ASIC is investigating whether ANZ should have announced at the time that the joint lead managers involved should have announced they took up approximately 25.5 million shares of the placement. The ANZ news release stated this represented approximately 0.91% of total shares on issue at that time.
However, many would say the more relevant way of looking at is that over 31% of the shares in the placement failed to find a buyer, which is a percentage that would generally raise eyebrows in that type of placement.
On the other side the action against ANZ is not as ‘black and white’ at first glance as various other regulatory actions. Certainly, AUSTRAC’s move on CBA for breaches of anti-money laundering (which has been settled with a record $700 million fine, and with the acknowledgment of more than 50,000 breaches) is much more clear-cut in our view. As an aside another notable difference is that ANZ CEO Shayne Elliott will not be facing an Ian Narev (the former CEO of CBA) style, ‘fall on your sword’ moment. Mr Elliott assumed the CEO position after the events in question, in early 2016.
Ultimately, we don’t expect the financial or reputational outcome to be too onerous however and believe at current prices the storm that is battering the banking industry and ANZ in particular with this case, is ‘priced in’.
With more levers for management to pull on shareholder’s behalf and the relative pessimism towards ANZ stock and sector, combined with an undemanding valuation setting a low bar to jump over going forward, we remain positive on ANZ for those with a medium term or longer investment horizon.
ANZ continues to restructure its business and on 30 May announced the sale of OnePath Life NZ Limted to Cigna Corporation for NZ$700 million.
The price represents a “slight” premium to embedded value and is expected to generate a gain on the sale of about NZ$50 million. It is anticipated to lift the ANZ Group’s Level 1 and Level 2 CET1 (common equity tier 1) ratios by about 5 basis points and 15 basis points respectively.
At the end of 31 March 2018, ANZ’s APRA CET1 capital ratio was already at 11%, above the 10.5% ‘unquestionably strong’ target level well before the 2020 deadline.
Source: ANZ
The ANZ New Zealand Investment Management business is not part of the OnePath Life transaction. The deal includes a 20-year strategic alliance for Cigna to provide insurance products to ANZ bank customers. ANZ said the transaction is in line with its goal of simplifying its business. The sale is subject to regulatory approval and is expected to close in FY19.
Earlier in May ANZ announced the sale of its 55% stake in its Cambodian banking joint venture to J Trust, a diversified Japanese financial holding listed on the Tokyo Stock Exchange. The deal is another one in a series to streamline its operations, and capital requirements, to build a better capitalised and balanced bank. Another strategic priority is to focus on areas where it can “win”. Improving the customer experience in a digital age and creating a stronger sense of core purpose, ethics and fairness are others.
Source: ANZ
ANZ has been trimming its retail presence in Asia as part of its strategic restructuring, instead focusing on institutional banking in the region.
ANZ states it is ranked as a top four corporate bank in Asia, with a significant presence in 15 countries in the region.
ANZ announced the sale of their retail and wealth businesses in Singapore, Hong Kong, China, Taiwan and Indonesia to DBS Bank in late October 2016 for US$80 million. Extending this strategy of exiting capital intensive businesses in the region, ANZ stated in early November 2017 that it was closing its Philippines’ retail banking business to focus on institutional banking in the country. Retail banking in the country ceased February 2018.
ANZ did not disclose the value of the sale of its Cambodian stake sale, but said it expects to incur a loss of around A$30 million on completion. The deal has been approved by the joint venture partner, but remains subject to local regulatory approval. ANZ said it will continue to ow its 55% stake and manage the business for up to 12 months to work closely with J Trust to ensure a smooth transition.
Turning to the charts, and on the daily, the bearish moving average crossover present since mid-November is suggestive of momentum to favour the downside. This is when the 50-day moving average (red line) crosses below the 200-day moving average (green line). Initial support at the July 2017 low of $28.22 (horizontal blue line) has failed to hold, as has an additional line of defence at the June low of $27.19. Prices turned forcefully up from support at $26.11 earlier last month, but have weakened once more. We need to see this key support level hold to improve the technical picture.
With reference to ANZ’s monthly chart, prices have entered a corrective phase of the overall technical cycle after printing a recent high of $30.80 last October (horizontal red line). Should the bears remain in control over the near term, then downside support is evident at the 61.8% Fibonacci retracement of $26.10 as represented by the blue set of retracements. In order for the broader uptrend to resume its path north, a sustained break above the aforementioned $30.80 resistance level is required.
Summary
The ANZ ‘cartel’ conduct case has sent shockwaves through the industry and will be a complex and technical case that will test lawyers on both sides and continue to garner many more headlines. Some have speculated the penalties could be as high as $2 billion or so, which would make the recent $700 million record fine for CBA seem modest. At this stage we would suggest that is scaremongering.
It is very early days though and much of any likely penalty and the uncertainty related to the outcome already seems to be largely reflected in the current valuation in our view. Investors seem to be becoming more hardened to the ‘bank bashing’ going around these days.
ANZ shares are trading on around 12x forecast FY18 earnings, falling to 11.2x the following year, while the price-to-book value multiples are roughly 1.3x and 1.25x respectively. The projected dividend yield over the same time frame is 6.0% expanding to 6.1%.
ANZ’s restructuring is progressing well and we were content with the earlier reported FY17 and interim fiscal 2018 results.
We continue to recommend the shares as a buy to Members without exposure and with a medium term, or longer, investment horizon.
Disclosure: ANZ Banking Group is held in the Fat Prophets Concentrated Australian Share and Australian Share Income models.
