Are the shares of Australia and New Zealand Banking Group (ASX: ANZ) too cheap to miss? The ANZ share price is down 37% since the COVID-19 crash.
Is ANZ an opportunity?
The big ASX banks are some of the few ASX shares that haven’t seen a strong recovery. It’s obvious why ASX shares like Qantas Airways Limited (ASX: QAN) and Webjet Limited (ASX: WEB) are still down. But most of the country, apart from Victoria, is largely back to normal.
But ANZ, Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Commonwealth Bank of Australia (ASX: CBA) are still suffering.
The banks are expecting to recognise higher bad debts over the medium term as some borrowers will be able to make their loan repayments, particularly when supportive initiatives like jobkeeper start winding down.
Looking at ANZ specifically, the major bank revealed in its recent quarterly update that it took a total provision charge of another $500 million for the June 2020 quarter, this followed a $1.674 billion charge taken in the first half. The new charge included an individually assessed provision charge of $264 million and a collective provision charge of $236 million to strengthen its credit reserves, particularly for deferral packages for small business customers.
The hope is that ANZ won’t always be under pressure from COVID-19 impacts. Many sectors of the Australian economy are doing well, so hopefully that flows through to an improvement for ANZ’s loans and profit.
It generated $1.3 billion of statutory profit after tax in the third quarter of FY20. That was an increase from the first half’s quarterly average of $773 million.
Continuing operations cash profit was $1.5 billion, almost double the first half quarterly average of $707 million. Excluding large/notable items continuing cash profit was $1.6 billion, up from the first half quarterly average of $1.2 billion.
ANZ dividend
One of the most important things for bank shareholders is the dividend.
ANZ announced a fully franked interim dividend of $0.25 per share after deferring it in its FY20 interim result. The bank said this took into account ANZ’s continuing capital strength and updated regulatory guidance (that their dividends have to be reduced, but they can pay one). The announced interim dividend represented 46% of ANZ’s first half statutory profit.
Big ASX banks like ANZ may decide to keep the dividend payout ratios lower for sometime, perhaps forever. I wouldn’t count on any of them for big dividend payouts.
Summary
According to CommSec, ANZ shares are priced at 12 times the estimated earnings for the 2021 financial year. If an effective vaccine can be distributed by June 2020 I think ANZ may prove to be a decent cheap opportunity. But I wouldn’t bet the house on it. I prefer many other ASX dividend shares over ASX banks, such as diversified investment conglomerate Washington H. Soul Pattinson and Co. Ltd (ASX: SOL). I wrote about WHSP here.
