anz bank - macquariemacquarie wealth management anz bank 20 may 2015 3 fig 3 us asset interest rate...

Please refer to page 22 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

AUSTRALIA

ANZ AU Underperform

Price (at 06:18, 20 May 2015 GMT) A$31.89

Valuation A$ 32.28 - DDM/PE

12-month target A$ 33.66

12-month TSR % +11.2

Volatility Index Low

GICS sector Banks

Market cap A$m 88,208

30-day avg turnover A$m 250.1

Number shares on issue m 2,766

Investment fundamentals Year end 30 Sep 2014A 2015E 2016E 2017E

Net interest Inc m 13,797 14,490 15,306 16,368 Non interest Inc m 5,656 5,968 6,160 6,521 Underlying profit m 10,693 11,138 11,737 12,774 Reported profit m 7,170 7,103 7,488 8,138 Adjusted profit m 7,027 7,273 7,488 8,138 EPS adj ¢ 247.9 255.6 253.8 264.3

EPS adj growth % 7.3 3.1 -0.7 4.1 PER adj x 12.9 12.5 12.6 12.1 PER rel x 0.81 0.75 0.82 0.87 Total DPS ¢ 178.0 180.0 180.0 182.0 Total div yield % 5.6 5.6 5.6 5.7 Franking % 100 100 100 100 ROA % 1.0 0.9 0.8 0.8

ROE % 14.8 14.1 13.0 12.8 Equity to assets % 6.4 6.0 6.4 6.5 P/BV x 1.8 1.7 1.5 1.4

ANZ AU vs ASX 100, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, May 2015

(all figures in AUD unless noted)

20 May 2015 Macquarie Securities (Australia) Limited

ANZ Bank Winter is coming Event

ANZ is caught in the grip of 3 macro drivers – one positive (US rates) and two

negative (Asia/Commodities bear market). We believe there remains substantial

risk around the US rate cycle, with upside likely to be competed away in any

event. Longer term we believe the ANZ super-regional strategy is on a collision

course with global and local regulators, with the only possible mitigant being

additional capital. Underperform.

Impact

Rising USD rates (and margin improvement) keep getting pushed out –

nevertheless we believe upside will get competed away – Recently our

economics team shifted their view on US rate “lift off”, pushing out rising US rates

from June to Sept The Global Macro Outlook - The Long Grinding Cycle

continues). This is relevant for ANZ as the biggest USD exposed of the major

banks as each 25bp increase in US rates is likely to drive 1% earnings upside.

While a rising US rate cycle could be positive, we note that “lift off” continues to

be pushed back and that Asian institutional banking is not a rational oligopoly but

rather a hyper-competitive market, where ANZ is most certainly a price taker,

meaning there is a material chance that any resulting upside is competed away.

Twin Asia/Commodities bear cycles continue to provide a negative

backdrop – ANZ also remains the most exposed to the twin bear markets of

commodities and Asia. No doubt rising US rates will affect credit growth and

impairment across Asia where ANZ’s competitors continue to experience much

greater performance deterioration than ANZ. On commodities, the bank has

started to see some impact on commodities volumes although we believe a wider

shake-out is yet to play out, with ANZ likely to be most affected.

Longer term Regional & Global models are under (capital) pressure which

is an issue for ANZ (and its dividend policy) – Our STAN/HSBC analyst,

Thomas Stoegner, recently highlighted the “big bank” break up case in response

to the costs and capital inefficiencies that now exist for the global banking model

(seeAsia and multinational banks - Welcome to the New Age). While ANZ

remains a smaller player than STAN/HSBC, we note that these two players

remain key competitors in Asia and that ANZ continues to try to replicate their

(now defunct) strategies. As ANZ continues to grow, we believe it will also likely

experience pressures, with capital the most obvious “Achilles heel”, given its

super-sized payout relative to its RWA growth (payout target of 65-70% implies

RWA growth needs to come down to 7-8% YoY from 14% annualised in 1H15.

Earnings and target price revision

We downgrade FY16/FY17 earnings by c1.5% and DPS by 1.1%. Price target

moves to $33.66 from $34.24.

Price catalyst

12-month price target: A$33.66 based on a DDM/PE methodology.

Catalyst: 3Q15 Trading Update in August.

Action and recommendation

Maintain Underperform.

http://www.macquarie.com/research/disclosures

Macquarie Wealth Management ANZ Bank

20 May 2015 2

Executive Summary

ANZ is caught in the grip of 3 macro drivers – one positive (US rates) and two negative

(Asia/Commodities bear market). We believe there remains substantial risk around the US rate

cycle, with upside likely to be competed away in any event. Longer term we believe the ANZ

super-regional strategy is on a collision course with global and local regulators, with the only

possible mitigant being additional capital.

Fig 1 ANZ Macro Backdrop Roadmap

Source: Macquarie Research, May 2015

We have downgraded earnings by c1.5% for FY16 and FY17 to factor in more margin pressure in

the institutional business as well as a reduction in loan fees. Our dividend forecast moves down by

1% as we think the payout ratio may need to come down given ANZ’s strong RWA growth

Fig 2 Earnings Changes – Downgrade Cash Earnings by c1.5% and dividend by 1.1%

FY15 FY16 FY17

Cash NPAT Old 7,309 7,606 8,278 New 7,273 7,488 8,138 % Change -0.5% -1.6% -1.7% Cash EPS Old 257 258 269 New 256 254 264 % Change -0.5% -1.5% -1.7% Dividend Old 182 182 184 New 180 180 182 % Change -1.1% -1.1% -1.1%


In this note we look to quantify the impact of these drivers.

US rate rise sees further delays, risk remains that the upside gets competed away

o A US rate hike is positive for ANZ with increased returns on USD assets, deposit margin

expansion, and improved trading income due to higher levels of FX volatility.

•There are a number of positives from rising US rates - although the timing of rates hikes remains uncertain...

•Increased returns on US assets, including US loans and deposits with the US Fed and a tightening of deposit spreads providing a funding cost benefit.

•US rate increases will lead to USD appreciation, increasing the value of USD and USD linked earnings.

•Increased currency volatility would benefit trading volumes.

•...However, any benefit may be competed away due to hyper-competitive Asian insto market , while there is also some downside to higher US rates

•Credit growth in Asia will likely slow, impacting earnings with less liquidity in Asia as capital allocation shifts to the US.

•Reduced fee income from reduction in lending volumes.

•Impairment levels likely to increase as rates increase.

•US wholesale funding costs will also rise from their current low levels.

Rising US rates keep getting pushed out

•Question marks remain over Asia strategy

•Avenue for growth given ANZ's larger than peer footprint in Asia, however this is dependent on Asia mounting a recovery.

•The growth outlook for China and much of Asia appears under pressure in the near-term.

•ANZ could look to continue to grow through acquisitions, however assets ANZ would acquire are available/cheap for a reason given the macro backdrop and would leave their already weak capital levels vulnerable

•Commodities bear market

•Potential for global commodity players to continue exiting Asia, allowing ANZ to grow through acquisition. However commodities provides a riskier revenue stream, which could lead to a P/E de-rate.

•Lower traded values off the back of lower prices, leading to lower lending income. If prices don't recover, maintaining low levels of volatility, trading income would be significantly impacted.

•Risks to impairment from ANZ's heightened exposure to the AU mining and resources sector relative to their peers.

Twin Asia/ Commodities bear cycles continue

•Multinational financial conglomerates not well adapted to new age given costs and capital inefficiencies

•Capital pressure from dividend policy likely to impede further dividend growth given outsized RWA growth

Regional and Global models are under (capital) pressure


20 May 2015 3

Fig 3 US Asset Interest Rate Sensitivity – 25bps would boost earnings by 1-2% depending on the quantum of deposit rates increases

Assets Liabilities

1H15 APEA Av. balance sheet (A$m) 157,469 146,851 APEA assets % linked to US rates* 50% US Federal Reserve Deposits (A$b)* 10.0 Increase in US rates (asset yield) 0.25% Additional Interest Income - Av. BS (A$m) 197 Additional Interest Income - US Fed (A$m) 25 FY15 Group NII increase % 1.5% Sensitivity to Deposit Rate Increases 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% Additional Int. Exp. - Av. BS (A$m) 184 147 110 73 37 - Group NIM benefit (bps) 0.5 1.0 1.5 2.0 2.5 3.0 Additional Cash Profit (A$m) 27 52 78 104 130 155 Cash profit increase % 0.4% 0.7% 1.1% 1.4% 1.8% 2.1%

*Note: Macquarie estimates based off available disclosures

Source: Company data, Macquarie Research, May 2015

o The timing of rates hikes has continually been pushed out. Our US economist now expects

the first rate hike to occur in September, pushed out from June.

o However there is a risk that any margin upside will be competed away given the hyper-

competitive nature of the Asian institutional banking market.

o Further, there are a number of other negative impacts that higher US rates could have

including slower credit growth and reduced fee income.

Twin Asia/ Commodities bear cycles continues.

o Economic indicators show that GDP growth has been slowing in Asia broadly as well as in

China specifically. We think that there is a risk that there is a further slow-down.

Fig 4 Asia (ex-Japan) & China GDP growth slowing Fig 5 Lead indicators point to further softness

Source: Macquarie Research Economics, Macquarie Research, May 2015 Source: Factset, Macquarie Research, May 2015

o On commodities, ANZ has started to see some impact on commodities volumes from

commodities price pressure although we believe a wider shake-out is yet to play out, with

ANZ likely to be most affected. Our commodities research team expect for prices in Iron

Ore and Coal to continue to decline throughout 2015 (Iron Ore: -14%, Coal: -20%) before

bottoming out in 2016.

o Commodities income is lower PE and a riskier proposition and lower prices would also lead

to a reduction in traded values - reducing lending income and leading to lower volatility.

Lower commodities prices could also result in higher impairment from ANZ’s Australian

resources and mining exposure.

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13.0 Real GDP Growth

Asia ex Japan China

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Jan-13 Jul-13 Jan-14 Jul-14 Jan-15

%YoYChina Macroeconomic Climate Index (NBS)


20 May 2015 4

Regional and Global models are under capital pressure

o Our STAN/HSBC analyst, Thomas Stoegner recently highlighted the “big bank” break up

case in response to the costs and capital inefficiencies that now exist for the global

banking model (see Asia and multinational banks - Welcome to the New Age). While ANZ

remains a smaller player than STAN/HSBC, we note that these players remain key Asia

competitors and that ANZ continues to try to replicate their (now defunct) strategies.

o As ANZ continues to grow, we believe it will also likely experience pressures, with capital

the most obvious “Achilles heel”, given its super-sized payout relative to its RWA growth

(ANZ’s target payout ratio of 65-70% implies RWA growth of 7-8% YoY, given 1H15 RWA

growth was 14% annualised this may be difficult).

Fig 6 ANZ payout too high given 11%+ RWA growth forecast for FY15

Drivers Sustainable payout ratio sensitivity

FY14 CET1 ($m) 31,776 FY15 cash profit forecast ($m) 7,309 1H15 RWA growth 7.0% FY15 RWA growth forecast 11.5%

Payout ratio 65% 70% Sustainable annual RWA growth 8.1% 6.9%


We discuss each of these issues in further detail below

Rising USD rates (and margin improvement) keep getting pushed out – nevertheless we believe upside will get competed away

Recently our economics team shifted their view on US rate “lift off”, pushing out rising US rates

from June to September The Global Macro Outlook - The Long Grinding Cycle continues). This is

relevant for ANZ as the biggest USD exposed of the Australian banks with each 25bp increase in

US rates is likely to drive 1% earnings upside.

While a rising US rate cycle could be positive, we note that “lift off” continues to be pushed back

and that Asian institutional banking is not a rationale oligopoly but rather a hyper-competitive

market, where ANZ is most certainly a price taker.

We discuss these issues in further detail below.

Rising US rates would lead to increased yield on USD linked assets and deposits with the Fed, with deposit spreads also likely to tighten providing a funding cost benefit

Given ANZ’s higher than peer USD concentration of assets (21% of ANZ interest earnings assets

within the APEA division) ANZ would see upside to their USD interest income as US rates

increase. Based off ANZ’s Geographical exposures and USD linked currencies we estimate that

50% of APEA assets are linked to US interest rates. Additionally ANZ hold ~$A22bn of central

bank deposits in the US, UK and Japan with a variable amount held with the US Fed (one third to

one half). For our analysis we have used A$10bn.

Fig 7 Exposure at Default by Geography Fig 8 c50% of APEA assets are linked to the US

Group EAD

APEA EAD US linked

USD linked APEA EAD

UK/Europe 4% 17% No 0%

Americas 4% 17% Yes 17%

Pacific 1% 4% No 0%

Singapore 4% 17% Various 4%

Hong Kong 3% 13% Yes 13%

NE Asia 6% 25% Mixed 13%

SE Asia 2% 8% Mixed 4%

24% 100%

50%

Source: ANZ, Macquarie Research, May 2015 Source:, Macquarie Research, May 2015


20 May 2015 5

Since 2010, ANZ’s APEA deposits as a proportion of group interest bearing liabilities have steadily

increased and now make up over 20% of the group’s interest bearing liabilities. Over the same

period ANZ’s deposit rate has declined, from a peak of ~4% to ~2.5%, demonstrating a shift

towards lower rate deposits. Given time deposits are the major contributor ANZ should see a small

timing benefit as rates increase prior to existing time deposits rolling on to the new rate.

Fig 9 APEA deposits as a % of group deposits were steadily increasing until 2H14


Typically in a rising rate environment it can be seen that deposit spreads tighten, providing a

funding cost tailwind for the bank, with the inverse holding true. We would expect something

similar to occur as rates rise in the US.

Fig 10 Rising cash rates have typically led to deposit spreads compressing in Australia with the inverse holding true


We estimate the combined impact would boost cash profit by 1- 2% for every 25bp increase in US

rates, with up to 3bps of improvement for the Group NIM. The additional income will come as a

result of the increase in asset yields, with the variable in this scenario being the amount in which

deposit rates will increase, impacting on the expense increase. Given the balance of ANZ’s

interest earning assets is greater than their liabilities, earnings would still be boosted even if

deposit costs increase by the same amount as asset yields.

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Time deposits Savings deposits Other demand deposits

Deposits from banks Weighted APEA Rate (RHS) Weighted Group Rate (RHS)

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Av. deposit rate to cash rate spread HoH Δ in Cash Rate (RHS)


20 May 2015 6

Fig 11 US Asset Interest Rate Sensitivity – 25bps would boost earnings by 1-2% depending on the quantum of deposit rates increases

Assets Liabilities

1H15 APEA Av. balance sheet (A$m) 157,469 146,851 APEA assets % linked to US rates* 50% US Federal Reserve Deposits (A$b)* 10.0 Increase in US rates (asset yield) 0.25% Additional Interest Income - Av. BS (A$m) 197 Additional Interest Income - US Fed (A$m) 25 FY15 Group NII increase % 1.5% Sensitivity to Deposit Rate Increases 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% Additional Int. Exp. - Av. BS (A$m) 184 147 110 73 37 - Group NIM benefit (bps) 0.5 1.0 1.5 2.0 2.5 3.0 Additional Cash Profit (A$m) 27 52 78 104 130 155 Cash profit increase % 0.4% 0.7% 1.1% 1.4% 1.8% 2.1%

*Note: Macquarie estimates based off available disclosures


Rising rates will also lead to USD appreciation, increasing USD sourced earnings

Rising rates will assist ANZ through USD appreciation which will benefit US sourced earnings.

Approximately 5.2% of ANZ’s FY14 earnings were directly USD sourced.

Fig 12 Approximately 5.2% are directly USD sourced Fig 13 US Rates impact the US FX Rate

Source: ANZ, Macquarie Research, May 2015 Source:, Factset, Macquarie Research, May 2015

Although most Asian countries have abandoned hard pegs to the USD (apart from Hong Kong and

Nepal) many still have soft pegs to the USD including the CNY, MYR, PGK and TWD.

We estimate, in total USD and USD correlated earnings make up 12% of ANZ’s cash earnings.

Fig 14 US and US Correlated earnings make up ~12.1% of cash earnings

FY14 Cash Earnings ($m) 7,027

USD Earnings % 5.2% USD Correlated Earnings % 6.9% USD Earnings ($m) 852


ANZ discloses it has hedged approximately 55% of its USD correlated earnings for FY15 and

expects to hedge 20% of foreign earnings in FY16.

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20 May 2015 7

Given the % of US related earnings, ANZ could see upside to cash earnings of 0.3% - 1.5% from

USD appreciation. This assumes they hedge 50% of their exposure. If they hedge less of their

exposure they could see further upside.

Fig 15 Upside of 0.3% - 1.5% to cash earnings from USD appreciation

% USD Currency Appreciation

5% 10% 15% 20% 25% AU/US FX Rate 0.88 0.84 0.80 0.77 0.74 Earnings Appreciation 43 85 128 170 213 Unhedged % 21.31 42.62 63.94 85.25 106.56 Upside to Cash Earnings 0.3% 0.6% 0.9% 1.2% 1.5%


Rising rates should also result in increased volatility, which in turn would improve trading volumes.

Another benefit to rising US rates is that there would likely be an increase in volatility, which could

boost trading volumes.

Fig 16 Trading income can benefit from increases in currency volatility

Source: Factset, Company data, Macquarie Research, May 2015

Below we have estimated the impact to trading income based on the average volatility and

average change in trading income over the period and have used this to infer the potential impact

to trading income from different levels of volatility.

Fig 17 Upside of c0.2% - 1.0% from an increase in volatility

Level of Volatility

2% 4% 6% 8% 10% Change in trading income 5% 9% 14% 18% 23% Additional Trading Income 20 40 61 81 101 Upside to Cash Earnings 0.2% 0.4% 0.6% 0.8% 1.0%


We now discuss the negative impacts from a rise in US rates.

However there are also a number of offsetting factors that will, in our view, outweigh the positives

While higher US rates could benefit the margin due to a reduction in liquidity this is likely a double-edged sword given the hyper-competitive nature of Asia into banking

Examining liquidity flows over time vs. the timing of US QE announcements we can see that as

US QE was implemented there was an influx of liquidity into Asia.

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2H06 1H07 2H07 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14

FX Rate Std Dev (AU/US) HoH (RHS) Change in Trading Income HoH


20 May 2015 8

Fig 18 There was a large influx of capital into Asia during the US QE programs

Source: Asian Development Bank, Macquarie Research, May 2015

Given the influx of capital into the region during the easing we think that there is a risk of a similar

outflow of capital post QE. Higher US rates will make investment in the US appear more attractive,

this will likely lead to an inflow of capital into the US and an outflow of capital from other regions.

While a reduction in liquidity could benefit the margin we expect that this would likely be competed

away, given that Asian institutional banking is not a rationale oligopoly but rather a hyper-

competitive market.

Further, we expect that a reduction in liquidity could reduce ANZ’s lending volumes in Asia. The

chart below compares capital inflows into the Asia region (per the above IMF data) to the HoH

change in ANZ’s Asia loan balance.

Fig 19 ANZ’s Asia GLA balance has benefitted from capital inflows due QE periods.

Source: Company data, Asian Development Bank, Macquarie Research, May 2015

Below we conduct a sensitivity analysis to determine the potential impact to cash earnings from a

reduction in liquidity in the region. We have assumed that a reduction in liquidity leads to a

reduction in credit growth.

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Capital Inflows $bn Asia Credit Growth HoH (RHS)


20 May 2015 9

Fig 20 Potential downside of c1.4% from loss of liquidity

YoY Credit Growth

-4% -8% -12% -16% -20% Asia Balance $bn 73.40 70.34 67.28 64.23 61.17 Reduction in credit $bn - 3.06 - 6.12 - 9.18 - 12.23 - 15.29 Cash earnings impact % -0.5% -0.9% -1.4% -1.9% -2.3%


Credit growth will slow as rates begin to rise…

As US rate begin to rise, we would expect to see credit growth begin to slow. Examining credit

growth in Asia (ex Japan) vs. the US Fed Funds rate it can be seen that credit growth has

benefitted from lower US rates.

When US rates begin the rise there is the risk that a similar reduction in credit growth is seen.

Currently, 15% of ANZ’s loan portfolio comes from the APEA region.

Fig 21 Low US rates have benefitted credit growth in Asia

Fig 22 APEA represents 15% of ANZ’s total loan portfolio

Source: IMF WorldBank, Macquarie Research, May 2015

Note: Break in credit growth line due to APEA classification change


Below we estimate the potential earnings impact from a reduction in credit growth to ANZ’s APEA

loan portfolio. A 5-15% YoY slowdown in credit growth could reduce cash earnings by c1.0%

Fig 23 Potential earnings downside of c1% from a reduction in APEA credit growth

Reduction in Credit Growth YoY

-5.0% -7.5% -10.0% -12.5% -15.0%

APEA Credit ($m) 83,938 81,729 79,520 77,312 75,103 Reduction from 1H15 ($m) (4,418) (6,627) (8,836) (11,045) (13,253) Cash Earnings Impact $m (34) (51) (68) (85) (102) Cash Earnings Impact % -0.5% -0.7% -1.0% -1.2% -1.5%


Slowing credit growth may also lead to a reduction in fee income

A reduction in volumes will have an impact on the level of fee income that ANZ can earn. By

comparing the change in trading income to the change in GLA we can see that the level of trading

income is influenced by the growth in the portfolio.

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GLA

APEA GLA as a % of total GLAAPEA HoH Credit Growth (RHS)


20 May 2015 10

Fig 24 Change in trading income mirrors the change in the size of the APEA loan portfolio


Our sensitivity analysis estimates there is a risk of a c0.4% reduction in cash earnings from a

reduction in loan fee income.

Fig 25 c0.4% reduction on fee income from a reduction in trading volumes

Reduction in Fee Income

-5.0% -10.0% -15.0% -20.0% -25.0%

Impact on APEA trading income 25 50 75 100 125 Impact on cash earnings % -0.1% -0.2% -0.4% -0.5% -0.6%


Overall impact of rising US rates likely to be negative for ANZ

In summary while there are some positives from rising US rates we expect the margin benefit to

be competed away and think the reduction in credit growth could also offset any benefits.

Fig 26 Overall impact of rising US rates likely to be negative for ANZ

Estimated Impact to cash earnings

Positives

Increased returns on USD assets and deposits with the Federal Reserve +1.1% USD appreciation, increasing US sourced earnings +0.9% Increased volatility should improve trading volumes +0.5% Total potential upside +2.5% Negatives Rising US rates increases the attractiveness of US investment, likely reducing liquidity in Asia -1.4% Credit growth will slow as rates begin to rise -1.0% Slowing credit growth will reduce loan fee income -0.4% Total potential downside -2.8% Net impact -0.3%


Question marks remain over Asia strategy given Asia slowdown

As discussed above there are a number of negative outcomes from higher US rates (slowing

credit growth, reduced liquidity) that put a question mark over ANZ’s Asia strategy and are likely to

lead to an economic slow-down in Asia. We discuss these in greater detail below.

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Trading Income HoH % Change APEA GLA HoH % Change (RHS)


20 May 2015 11

Asia slowdown evident

Economic indicators show that GDP growth has been slowing in Asia broadly as well as in China.

Our economists expect growth to further slow in 2015-16. Further, the NBR macro-economic lead

indicator climate index for China shows a reduction in growth expectations over the past 6 months.

Fig 27 Asia (ex-Japan) and China GDP growth has been slowing Fig 28 Lead indicators point to further softness

Source: Macquarie Research Economics, Macquarie Research, May 2015 Source: Factset, Macquarie Research, May 2015

Slowing GDP growth is likely to have a negative impact on ANZ’s Asia operations and could lead

to a reduction in credit growth, as well as slow down in trading income from reduced trade activity.

Confused Asian strategy - Super regional strategy at odds with capital requirements

ANZ has a target to source 25% - 30% of group revenue from the APEA region by 2017. As at

1H15, revenue sourced from the APEA “network” was 24% of group revenue (see figure 48

below), although the APEA division itself only contributed 19%.

Fig 29 Contribution from APEA has been growing but remains below 25% target


Further, Asia growth appears to be at odds with the companies’ goal of bolstering capital through

divestment of some of their Associate positions.

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A

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Real GDP Growth

Asia ex Japan China

-2

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%YoYChina Macroeconomic Climate Index (NBS)

10%

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1H12 2H12 1H13 2H13 1H14 2H14 1H15

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20 May 2015 12

Fig 30 ANZ’s CET1 at the bottom of the peer set

Fig 31 ANZ happy to approach APRA’s 8.0% CET1 minimum, not viewing this as a “hard-floor”



In addition to the Asia slowdown, the commodities bear market is also pressuring ANZ’s returns.

Global commodities prices remain under pressure

ANZ has started to see some impact on commodities volumes from commodities price pressure

although we believe a wider shake-out is yet to play out, with ANZ likely most affected.

We expect a shifting regulatory view to result in further exits from global players providing an

opportunity for ANZ. However we think there are a number of reasons why growing its

commodities business is risky, particularly given commodities income is lower PE and a riskier

proposition.

Continued pressure on commodity prices, as well as a shifting US regulatory view could lead

to further exits from global players, resulting in acquisition opportunities.

Commodities prices have fallen significantly over the past year and regulator actions are forcing

major commodities players to reconsider their intentions in commodities.

Our commodities research team expect for prices in Iron Ore and Coal to continue to decline for

the remainder of 2015 (Iron Ore: -14%, Coal: -20%) before bottoming out in 2016.

Fig 32 Major commodities have seen significant declines in price over the past year

Source: Factset, Macquarie Research, May 2015

8.00%

8.25%

8.50%

8.75%

9.00%

9.25%

9.50%

ANZ (1H15) CBA (1H15) WBC (1H15)

Dec-14 Capital/DRP Initiatives Asset Sales

7.7%

7.8%

7.9%

8.0%

8.1%

8.2%

8.3%

8.4%

8.5%

8.6%

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1H15 Div declared Discounted DRP Post-div payment

APRA regulatory minimum 8.0%

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Iron ore Thermal Coal Copper Brent


20 May 2015 13

The Federal Reserve in particular is considering restrictions on physical commodities activities to

‘help ensure that physical commodities activities are conducted in a safe and sound manner and

do not pose a threat to financial stability’. Any additional restrictions by the Fed could result in

further reassessment of company’s commodities investments. While APRA hasn’t indicated any

restrictions on commodity trading, it may be uncomfortable if any ADI is seen to divert too far away

from its core banking activities. Below we highlight the recent bank moves out of commodities.

Fig 33 Investment banks are re-thinking their commodities investments

Company Buyer Sold/ Closed Retained

Bank of America Merrill Lynch

Closed European power and gas sales and trading desk US power and gas

Barclays Base metals, energy and agricultural products Precious metals and derivatives tied to the price of oil and gas as well as commodity indexes

Credit Suisse Metal and Energy trading desks employs 80 people

Remainder of commodities business

Deutsche Bank Shut dedicated energy, agriculture, dry-bulk and industrial-metals trading Trading of financial derivatives and precious metals

Goldman Sachs Said in May its exploring a sale of Metro International Trade Services, an operator of warehouses that store metal traded on the London Metal Exchange


JP Morgan Mecuria Physical commodities trading business sold for $3.5bn Still provide vaulting and trading of precious metals

Morgan Stanley Rosneft Global oil merchanting. Is also exploring options to sell its stake in TransMontaigne Inc, a petroleum & chemical transportation and storage company

Will retain power and natural gas desks

Standard Bank ICBC Sold 60% of commodities arm to ICBC bank for $765m


UBS JP Morgan Closed majority of its flow trading Precious metals and index based trading capabilities


The exit of major players could result in acquisition opportunities for ANZ.

However, income from commodities is a much more risky proposition and lower PE.

Income from commodities is quite volatile and lower PE (see our note)ANZ Bank - Where Giants

Fear to Tread. ANZ’s 1Q15 trading update highlighted this with IIB weakness, caused by

"significant reductions in commodity prices impacting the value of shipments”.

US FINRA member firms commodity revenue shows the level of volatility in returns. Interestingly,

smaller scale players (such as CS) have much higher earnings volatility (twice as much as shown

in the chart below) relative to their larger peers (Goldman Sachs and JPM).

Fig 34 Commodities revenue has been volatile…

Fig 35 …with volatility much higher at the smaller vs. the larger more established players

Note: Only includes commodities revenue from FINRA member firms

Source: SIFMA, Macquarie Research, May 2015

Source: Goldman Sachs, JP Morgan, Credit Suisse, Macquarie Research, May 2015

There could also be a negative impact to ROE given the additional capital that needs to be held

and given that commodities is in some cases a lower than current Group RoE business.

-3,000

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CHF MUSD M

Avg Major Players Credit Suisse (RHS)

Coefficient of variation

Major players: 0.52Credit Suisse: 1.06


20 May 2015 14

Fig 36 Expanding into commodities could have a negative impact on RoE for ANZ

Bps Earnings Upside

bps $M 1% 2% 3% 4% 5%

Capital Impact

2 950 -15 0 15 29 44

4 1,899 -43 -29 -14 0 14 6 2,849 -71 -57 -43 -28 -14 8 3,798 -97 -84 -70 -56 -42

Source: McKinsey, Macquarie Research, May 2015

Investment banks generally have higher earnings volatility and a lower PE vs. traditional banks

such as ANZ. Comparing the average PE from Goldman Sachs and Morgan Stanley to the

Australian majors it can be seen that the investment banks PE is more volatile and on average

lower than the majors. Clearly GS and MS are established scale players with a broad range of

businesses. If and when ANZ looks to pursue this type of opportunity we would think that the likely

PE discount is greater than the 2 PE point gap observed here in the market.

Fig 37 Investment bank PE’s are typically lower and more volatile compared to the Australian Majors with a ~2.0x PE differential

Investment banks included are Goldman Sachs and Morgan Stanley. AU Majors include: ANZ, CBA, NAB and WBC. Average PE excludes outlier periods for the US investment banks.

Source: Factset, Macquarie Research, May 2015

Lower prices would also lead to a reduction in traded values - reducing lending income

Another negative from lower commodities prices is that lower prices reduce the traded value of

assets which in turn reduces the level of lending income that can be earned off these assets.

Fig 38 Mining lending has dropped off following a reduction in commodities prices

Source: RBA, Macquarie Research, May 2015

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AU Majors US Investment Banks Avg AU Majors Avg US Investment Banks

Average PE difference between the Investment banks and the Australian majors is 2.0x

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Change in Commodities

Prices

Change in Lending to Mining Sector

Change in lending to mining sector Change in Bulk Commodities Prices (RHS)


20 May 2015 15

Given the reduction in commodities prices we conduct a sensitivity analysis to determine the

potential downside to cash earnings from a reduction in lending and therefore NII.

Fig 39 Reduction in resources lending could reduce cash earnings by c0.5%

YoY % Decline in Resources Lending

5% 10% 15% 20% 25% Balance - 975 - 1,950 - 2,925 - 3,900 - 4,875 NII - 47 - 94 - 140 - 187 - 234 Cash Earnings Impact -0.2% -0.4% -0.6% -0.8% -1.0%


Low prices and low volatility would be a double negative for ANZ

Higher levels of volatility in commodities prices create opportunities for increased levels of trading

income. Volatility tends to be highest during periods of crises such as the GFC/ Great depression.

Fig 40 Commodity Price Volatility increases during crises such as the GFC and Great Depression Fig 41 Volatility in commodity and other asset prices

Source: RBA, Macquarie Research, May 2015 Source: RBA, Macquarie Research, May 2015

While lower commodities prices can equate to lower trading income the real negative for ANZ

would be if there is also a lower level of volatility in prices. The chart below shows the level of

volatility in the price of oil and coal and the corresponding commodities trading income (at a US

system level) over the same time period. It is clear that during higher levels of volatility trading

income was higher.

Fig 42 Higher levels of commodity price volatility is positive for trading income

Note: Only includes commodities revenue from FINRA member firms

Source: IMF, SIFMA, Macquarie Research, May 2015

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Commod Prices Volatility

Petroleum Std Dev Coal Std Dev Commodities Income $m

Higher volatility in prices has resulted in

higher commodities trading income


20 May 2015 16

Lower commodities prices could also result in higher impairment from ANZ’s Australian

resources and mining exposure

Lower commodities prices will reduce the value of assets for players in the space as well as

incomes for individuals who work in these areas. Whilst the majors direct exposure to these

sectors is low (c24% of mining/resources debt is financed by the majors), there is no doubt that

knock-on impacts coupled with very low existing impairment levels could see impairment creep up.

Of the majors ANZ has the most direct exposure to mining and resources companies with 9% of

total commodities exposure (based on dialogic syndicated loan data). This is followed by CBA

(6%) NAB (5%) and WBC (4%).

Fig 43 ANZ is most exposed to mining and resources with ~9% of outstanding exposure

Source: Deal Logic, Macquarie Research, May 2015

As a % of total loans ANZ’s EAD exposure equates to c2.2% of loans.

Fig 44 ANZ has 2.2% EAD exposure to Resources

Source: ANZ, Macquarie Research, May 2015

ANZ CBA NAB WBC Other Total

AGG 123 123 - 123 711 1,079

AGO - - - - 325 325

ASL - 94 - - 469 562

AUT - - - - 450 450

AWE 94 - 94 94 - 281

BCI 65 65 - - - 130

BPT 73 73 73 - 73 291

BSE - - - - 340 340

DLS 23 23 - - - 47

EVN 104 - - - 104 207

FMG 983 - - - 6,323 7,305

FND - 41 - - - 41

GDO - - - - 96 96

GNM - - - - 432 432

HZN 40 40 - - 80 160

MAH - 106 - - 366 472

MIN 146 146 146 146 119 703

MOY - - 32 - 26 59

NWH 59 - 59 - 118 236

OGC - - - - 487 487

OSH 33 33 33 33 367 500

OZL 50 - 50 50 17 167

PDN - - - - 572 572

PNA 39 39 - - 98 138

ROC - 37 - - 73 110

SBM - - 60 - 60 121

SFR 102 102 102 - 102 409

STO 345 345 283 112 1,417 2,502

Unlisted 2,134 1,675 1,520 1,415 23,108 29,852

WHC 88 88 88 88 879 1,231

WPL 32 56 - - 1,290 1,378

ZEL 78 - - 78 155 310

Total 4,610 3,086 2,540 2,138 38,655 50,991

% of total commodities exposure 9.0% 6.1% 5.0% 4.2% 75.8%

% of total loan book 0.9% 0.5% 0.5% 0.4%

Total Exposure by Company (yet to mature) ($m)


20 May 2015 17

The issue here of course remains where we are in the cycle. If things soften substantially then it

may well be that we are in an early downswing with the potential for the major banks to take

additional “overlays” even if signs of stress are not yet visible.

Longer term Regional and Global models are under (capital) pressure which is an issue for ANZ’s dividend policy

Our STAN/HSBC analyst, Thomas Stoegner recently highlighted the “big bank” break up case in

response to the costs and capital inefficiencies that now exist for the global banking model (see

Asia and multinational banks - Welcome to the New Age). While ANZ remains a smaller player

than STAN/HSBC, we note that these two players remain key competitors in Asia and that ANZ

continues to try to replicate their (now defunct) strategies.

As ANZ continues to grow, we believe it will also likely experience pressures, with capital the most

obvious “Achilles heel”, given its super-sized payout relative to its RWA growth.

Several factors working against ANZ’s push to become a super regional bank

There are several factors working against ANZ’s push to become a super regional bank with both

domestic and global regulators pushing for smaller banks more generally, via heightened capital

requirements. This has manifested in a number of ways so far:

Additional loss absorbency requirements for Global Systemically Important Banks (G-SIB);

The potential for banks to pre-position Total Loss Absorbing Capital (TLAC) internally; and

APRA’s capital treatment of overseas minority interests.

We would expect ongoing pressure for any bank looking to be a cross border powerhouse.

Additional loss absorbency requirements for GSIBs

The unquestionable push by global regulators for bank capital levels to increase, is most clearly

seen at multinational financial conglomerates considered G-SIBs. Should ANZ continue to pursue

its “super regional strategy” we believe there is a risk ANZ comes under further scrutiny in this

regard.

Fig 45 G-SIBs by bucket as of Nov-14 with additional loss absorbency required

Bucket Additional loss absorbency G-SIBs

5 3.5% Nil

4 2.5% HSBC JP Morgan Chase

3 2.0% Barclays Citigroup BNP Paribas Deutsche Bank

2 1.5% Bank of America Goldman Sachs Morgan Stanley Credit Suisse Mitsubishi UFJ FG Royal Bank of Scotland

1 1.0% Agricultural Bank of China Group Crédit Agricole Santander Sumitomo Mitsui FG Bank of China ICBC Société Générale UBS Bank of New York Mellon ING Bank Standard Chartered Unicredit Group BBVA Mizuho FG State Street Wells Fargo Groupe BCPE Nordea

Source: BIS, Macquarie Research, May 2015

Additionally the 1H15 result showed the contribution to IIB profits from EMEA was up significantly

(167% vs. PCP). Whilst this is a positive from a growth/earnings perspective, it highlights that the

‘super regional’ strategy at ANZ could be developing into a global one. The concern here is that

cost and capital inefficiencies associated with the global banking model are almost certainly

increasing.


20 May 2015 18

Fig 46 ANZ appears to be expanding their strategy beyond ‘super regional’ to global

Source: ANZ, May 2015

Pre-positioning of TLAC internally for material overseas subsidiaries

The FSB has previously suggested that banks may need to pre-position Total Loss Absorbing

Capital (TLAC) internally (see our note Australian Banks - G20 = Follow the G-SIB Rules),

whereby any overseas subsidiary deemed to be material would have to maintain internal TLAC of

75-90% of the group requirement. A material subsidiary would satisfy the criteria laid out in figure

46.

In our view this will likely reduce the attractiveness of big offshore subsidiaries given TLAC will

need to be held in country, removing many of the regional/global banking model synergies (e.g.

use of below market cost related party funding lines).

Fig 47 TLAC requirements

Fig 48 As ANZ targets more Asian sourced earnings, the materiality of their subsidiaries may come into question

1 Has more than 5% of the consolidated risk-weighted assets of the group

2 Generates more than 5% of the consolidated revenue of the group

3 Has a total leverage exposure measure larger than 5%

of the groups total leverage exposure

4 Has been identified by the firm’s CMG as material to exercise of firm’s critical functions

Source: FSB, Macquarie Research, May 2015 Source: ANZ, May 2015

APRA’s capital treatment of overseas minority interests

APRA also seeks to penalise banks with respect to the capital treatment of overseas minority

interests, whereby 100% of the capital held is deducted from the groups CET1 ($4.5b for ANZ as

at 1H15). This has been an ongoing point of discussion for ANZ as they look to exit some of their

minority interests (most notably PT Bank Pan Indonesia).


20 May 2015 19

Fig 49 ANZ’s investments in associates as at 1H15

Source: ANZ, May 2015

This was further substantiated by CEO Mike Smith at their 1H15 results presentation when he

flagged potential capital benefits should they resolve the “complex issue of their international

partnerships”, however due to their complexity and previous difficulties they have experienced in

formulating an exit strategy this could still be long dated.

More broadly we believe APRA’s protection of depositors mandate is likely to mean shareholders

will have to provide an additional equity buffer to ensure asset quality issues don’t put deposit

holder funds at risk.

As ANZ continues to grow, we believe capital will be the most obvious “Achilles heel”, given its super-sized payout relative to its RWA growth as well

With a current dividend payout ratio range of 65-70% and rapid RWA growth, it could be said that

ANZ is growing too fast to maintain their current dividend policy. Based off our FY15 cash profit

forecasts, ANZ’s RWA growth can run at 7-8% YoY for 65-70% to be a sustainable payout ratio.

When you consider that ANZ’s RWA grew 14% annualised in 1H15, this could be difficult to

achieve.

Fig 50 ANZ payout too high given 11%+ forecast RWA growth for FY15

Drivers Sustainable payout ratio sensitivity

FY14 CET1 ($m) 31,776 FY15 cash profit forecast ($m) 7,309 1H15 RWA growth 7.0% FY15 RWA growth forecast 11.5% Payout ratio 65% 70% Sustainable RWA growth 8.1% 6.9%


As a result we dial back our dividend for ANZ ~1% over the forecast horizon as we expect them to

maintain their pursuit of growth.

Investment View

ANZ is caught in the grip of 3 macro drivers – one positive (US rates) and two negative

(Asia/Commodities bear market). We believe there remains substantial risk around the US rate

cycle, with upside likely to be competed away in any event. Longer term we believe the ANZ

super-regional strategy is on a collision course with global and local regulators, with the only

possible mitigant being additional capital.

We have downgraded earnings by c1.5% for FY16 and FY17 to factor in more margin pressure in

the institutional business as well as a reduction in loan fees. Our dividend forecast moves down by

1% given we think the payout ratio may need to come down given ANZ’s strong RWA growth.


20 May 2015 20

Fig 51 Earnings Changes – Downgrade Cash Earnings by c1.5% and dividend by 1.1%

FY15 FY16 FY17

Cash NPAT Old 7,309 7,606 8,278 New 7,273 7,488 8,138 % Change -0.5% -1.6% -1.7% Cash EPS Old 257 258 269 New 256 254 264 % Change -0.5% -1.5% -1.7% Dividend Old 182 182 184 New 180 180 182 % Change -1.1% -1.1% -1.1%


Fig 52 ANZ Financial Summary


ANZ Bank Year Ending 30 September 2013 1H14 2H14 2014 1H15 2H15 2015 2016 2017

Underperform PER SHARE DATA

Cash EPS (AUD) - Macquarie Basis 231 124 124 248 130 126 256 254 264

Current Price Target Price Cash EPS Growth (%) 6% 6% -1% 7% 5% -3% 3% -1% 4%

$32.04 $33.66 DPS (AUD) 164 83 95 178 86 94 180 180 182

Total Shareholder Return 10.7% BVPS (AUD) 16 17 18 18 19 19 19 21 22

NTA PS (AUD) 13 14 15 15 16 16 16 17 19

Bloomberg: ANZ AU Shares on issue (m) 2,744 2,744 2,757 2,757 2,766 2,781 2,781 2,938 3,011

Reuters: ANZ.AX

VALUATION METRICS

Macquarie Equities | Australian BanksP/E (Cash) 13.9 12.9 13.0 12.9 12.3 12.7 12.5 12.6 12.1

Analyst(s) Contact(s) P/B (Stated) 2.0 1.9 1.8 1.8 1.7 1.7 1.7 1.5 1.4

Michael Wiblin +61 2 8232 6089 P/NTA 2.4 2.3 2.2 2.2 2.0 2.0 2.0 1.8 1.7

Anita Stanley +61 2 8232 9869 RoE (%) 15.1% 15.2% 14.8% 15.0% 14.6% 13.6% 14.1% 13.0% 12.7%

Brendan Carrig +61 2 8237 6043 RoA (%) 1.0% 1.0% 0.9% 0.9% 0.9% 0.8% 0.9% 0.8% 0.8%

Dividend Yield (%) 5.1% 5.2% 5.9% 5.6% 5.4% 5.9% 5.6% 5.6% 5.7%

Dividend Payout (%) 71.0% 66.7% 76.9% 71.8% 66.2% 74.8% 70.4% 70.9% 68.9%

Sustainable RoE used in Valuation (%) 12.1% 12.1% 12.1% 12.1% 12.1% 12.1% 12.1% 12.1% 12.1%

Cost of Equity (%) 9.8% 9.8% 9.8% 9.8% 9.8% 9.8% 9.8% 9.8% 9.8%

PROFIT & LOSS (AUDm)

Net Interest Income 12,772 6,764 7,033 13,797 7,138 7,352 14,490 15,306 16,368

Non-Interest Income 5,606 2,904 2,752 5,656 3,047 2,921 5,968 6,160 6,521

Fees & Commissions 2,459 1,255 1,260 2,515 1,308 1,233 2,541 2,584 2,709

Financial Markets 1,336 707 815 1,522 424 382 806 804 835

Life and Funds 1,216 611 802 1,413 979 1,019 1,998 2,178 2,379

Other Revenue 595 331 -125 206 336 287 623 594 598

Total Operating Income 18,378 9,668 9,785 19,453 10,185 10,273 20,458 21,466 22,889

Total Operating Costs 8,236 4,286 4,474 8,760 4,593 4,727 9,320 9,729 10,115

Employee Costs 4,757 2,493 2,558 5,051 2,715 2,769 5,484 5,706 5,936

Other Costs 3,479 1,793 1,916 3,709 1,878 1,958 3,836 4,023 4,179

Pre-Provision Operating Profit 10,142 5,382 5,311 10,693 5,592 5,546 11,138 11,737 12,774

Impairment Charge 1,197 528 461 989 510 540 1,050 1,329 1,482

Pre-Tax Profit 8,945 4,854 4,850 9,704 5,082 5,005 10,087 10,408 11,292

Tax Expense 2,437 1,333 1,333 2,666 1,398 1,401 2,799 2,904 3,138

Minority Shareholders -10 -6 -6 -12 -8 -8 -16 -16 -16

Other Post Tax Items 226 134 -277 -143 170 0 170 0 0

Stated Net Profit 6,272 3,381 3,789 7,170 3,506 3,597 7,103 7,488 8,138

Extraordinary & Other Items 283 134 -277 -143 170 0 170 0 0

Hybrid Distributions -57 0 0 0 0 0 0 0 0

Derivatives & Hedging Revaluation 0 0 0 0 0 0 0 0 0

Macquarie Cash Profit 6,498 3,515 3,512 7,027 3,676 3,597 7,273 7,488 8,138

BALANCE SHEET & CAP AD (AUDm)

Risk Weighted Assets* 339,265 360,740 361,529 361,529 386,863 402,931 402,931 432,200 507,260

Interest Earning Assets 575,284 632,400 661,515 646,958 703,369 732,907 718,138 769,775 827,375

Gross Loans, Advances & Acceptances 473,774 513,615 525,534 525,534 561,907 585,505 585,505 625,567 672,329

Total Deposits 522,854 585,096 603,782 603,782 669,342 697,451 697,451 745,174 800,876

Total Assets 702,991 737,815 772,092 772,092 860,087 894,014 894,014 954,097 1,023,260

Shareholders Equity 45,615 47,038 49,284 49,284 52,051 53,745 53,745 61,233 66,578

Tier 1 Capital* 35,192 37,315 38,601 38,601 41,088 41,919 41,919 48,015 52,258

Tier 1 Ratio (%)* 10.37% 10.34% 10.68% 10.68% 10.62% 10.40% 10.40% 11.11% 10.30%

Core Tier 1 Ratio (%) - Basel III 8.49% 8.33% 8.79% 8.79% 8.72% 8.58% 8.58% 9.41% 8.85%

ASSET QUALITY

Impairment Charge / GLAA (bp) 25 21 18 19 19 19 18 21 22

Coverage (%) 102% 119% 136% 136% 149% 155% 155% 176% 197%

KEY RATIOS & GROWTH

Net Interest Income growth (%) 5.5% 3.5% 4.0% 8.0% 1.5% 3.0% 5.0% 5.6% 6.9%

Non-Interest Income growth (%) 2.5% 5.4% -5.2% 0.9% 10.7% -4.1% 5.5% 3.2% 5.9%

Total Revenue growth (%) 4.5% 4.0% 1.2% 5.8% 4.1% 0.9% 5.2% 4.9% 6.6%

Cost growth (%) 2.7% 2.0% 4.4% 6.4% 2.7% 2.9% 6.4% 4.4% 4.0%

Pre-Provision Profit growth (%) 6.1% 5.7% -1.3% 5.4% 5.3% -0.8% 4.2% 5.4% 8.8%

RWA growth (%) 13.0% 6.3% 0.2% 6.6% 7.0% 4.2% 11.5% 7.3% 17.4%

GLAA growth (%) 9.2% 8.4% 2.3% 10.9% 6.9% 4.2% 11.4% 6.8% 7.5%

Deposit growth (%) 11.0% 4.4% 2.4% 6.9% 8.8% 4.2% 13.3% 6.8% 7.5%

Net Interest Margin (%) 2.22% 2.14% 2.13% 2.13% 2.03% 2.01% 2.02% 1.99% 1.98%

Cost / Income Ratio (%) 44.8% 44.3% 45.7% 45.0% 45.1% 46.0% 45.6% 45.3% 44.2%

*B2.5 2012, B3 2013 onward

2.00%

2.10%

2.20%

2.30%

2.40%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2013 1H14 2H14 2014 1H15 2H15 2015 2016

Margins & VolumesNet Interest Margin (%) GLAA growth (%)

42.0%

44.0%

46.0%

48.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2013 1H14 2H14 2014 1H15 2H15 2015 2016

Efficiency

Cost / Income Ratio (%) Cost growth (%)

15

17

19

21

23

25

27

29

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

2013 1H14 2H14 2014 1H15 2H15 2015 2016

Asset QualityImpairment Charge / GLAA (bp) Coverage (%)

5.356.84

19.06

1.02

0.0

5.0

10.0

15.0

20.0

25.0

Total Stage 1 Dividends

Total Fade Period Dividends

Total Perpetuity Dividends

Total Surplus Capital Per Share

DDM Valuation


20 May 2015 21

Macquarie Quant View

The quant model currently holds a reasonably positive view on ANZ Bank.

The strongest style exposure is Price Momentum, indicating this stock has

had strong medium to long term returns which often persist into the future.

The weakest style exposure is Profitability, indicating this stock is not

efficiently converting its investments to earnings as proxied by ratios such

as ROE, ROA etc.

Displays where the

company’s ranked based on

the fundamental consensus

Price Target and

Macquarie’s Quantitative

Alpha model.

Two rankings: Local market

(Australia & NZ) and Global

sector (Banks)

170/669 Global rank in

Banks

% of BUY recommendations 38% (6/16)

Number of Price Target downgrades 2

Number of Price Target upgrades 2

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score

(higher is better).

For the comparable firms this chart shows the key underlying styles and their

contribution to the current overall Alpha score.

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions

signal that favours analysts who have more timely and higher conviction

revisions. Current score shown below.

Breakdown of 1 year total return (local currency) into returns from dividends, changes

in forward earnings estimates and the resulting change in earnings multiple.

What drove this Company in the last 5 years How it looks on the Alpha model

Which factor score has had the greatest correlation with the company’s

returns over the last 5 years.

A more granular view of the underlying style scores that drive the alpha (higher is

better) and the percentile rank relative to the sector and market.

Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

Fu

nd

am

en

tals

Quant

Local market rank Global sector rank

Attractive

0.1

0.1

0.4

0.7

0.7

0.9

1.0

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Westfield Corporation

Suncorp

Scentre Group

National Australia Bank

ANZ Bank

Westpac Banking Corporati…

Commonwealth Bank

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%


Suncorp

Scentre Group


ANZ Bank


Commonwealth Bank

Valuations Growth Profitability Earnings

Momentum

Price

Momentum

Quality

-0.8

-0.5

-0.8

0.5

0.1

-0.4

0.2

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0


Suncorp

Scentre Group


ANZ Bank


Commonwealth Bank

-90% -40% 10% 60%


Suncorp

Scentre Group


ANZ Bank


Commonwealth Bank

Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

-25%

-24%

-23%

-22%

27%

29%

29%

30%

-40% -20% 0% 20% 40%

⇐ Negatives Positives ⇒

EPS Growth FY1

Return on Equity NTM

EBITDA Revisions 3 Month

DPS Growth FY1

PE Growth FY1

Price to Earnings FY0

Price to Sales LTM

Price to Book FY0

0 1

Technicals & TradingRisk

LiquidityCapital & Funding

QualityPrice Momentum

Earnings MomentumProfitability

Growth

ValuationAlpha Model Score

-0.35 0.25

1.40 0.07

-0.04 0.07

-0.11-0.27-0.01

-0.07 0.71

0 1

Normalized

Score

0 50 100

Percentile relative

to sector(/669)

0 50 100

Percentile relative

to market(/418)


20 May 2015 22

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 March 2015

AU/NZ Asia RSA USA CA EUR Outperform 48.99% 59.51% 49.30% 43.79% 59.59% 52.20% (for US coverage by MCUSA, 7.42% of stocks followed are investment banking clients)

Neutral 34.12% 26.62% 35.21% 50.29% 34.93% 31.32% (for US coverage by MCUSA, 5.68% of stocks followed are investment banking clients)

Underperform 16.89% 13.87% 15.49% 5.93% 5.48% 16.48% (for US coverage by MCUSA, 0.87% of stocks followed are investment banking clients)

ANZ AU vs ASX 100, & rec history

(all figures in AUD currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, March 2015

12-month target price methodology

ANZ AU: A$33.66 based on a DDM/PE methodology

Company-specific disclosures: ANZ AU: MACQUARIE CAPITAL (NEW ZEALAND) LIMITED or one of its affiliates is currently managing or co-managing a public offering of securities of ANZ Bank New Zealand Ltd. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

Date Stock Code (BBG code) Recommendation Target Price 17-Feb-2015 ANZ AU Underperform A$34.24 31-Oct-2014 ANZ AU Underperform A$31.26 22-Oct-2014 ANZ AU Underperform A$31.32 25-Sep-2014 ANZ AU Underperform A$31.41 16-Sep-2014 ANZ AU Underperform A$32.95 15-Aug-2014 ANZ AU Underperform A$32.59 02-Jul-2014 ANZ AU Underperform A$33.81 01-May-2014 ANZ AU Underperform A$34.70 20-Mar-2014 ANZ AU Neutral A$34.36 11-Feb-2014 ANZ AU Neutral A$34.06 22-Jan-2014 ANZ AU Neutral A$34.14 04-Dec-2013 ANZ AU Neutral A$33.01 29-Oct-2013 ANZ AU Neutral A$34.02 17-Oct-2013 ANZ AU Neutral A$33.48 16-Sep-2013 ANZ AU Outperform A$36.02 16-Aug-2013 ANZ AU Outperform A$35.52 09-Jul-2013 ANZ AU Outperform A$35.50 21-Jun-2013 ANZ AU Outperform A$35.53 31-May-2013 ANZ AU Outperform A$34.93 30-Apr-2013 ANZ AU Outperform A$34.25 21-Mar-2013 ANZ AU Outperform A$31.00


20 May 2015 23

15-Feb-2013 ANZ AU Outperform A$30.53 01-Feb-2013 ANZ AU Outperform A$29.40 24-Jan-2013 ANZ AU Outperform A$28.89 11-Jan-2013 ANZ AU Outperform A$28.57 25-Oct-2012 ANZ AU Outperform A$27.93 02-Oct-2012 ANZ AU Outperform A$27.89 25-Sep-2012 ANZ AU Outperform A$27.51 17-Aug-2012 ANZ AU Outperform A$26.98 23-Jul-2012 ANZ AU Outperform A$25.42 18-May-2012 ANZ AU Outperform A$25.92 02-May-2012 ANZ AU Outperform A$26.18

Target price risk disclosures: ANZ AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.

Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) (“MGL”) and its related entities (the “Macquarie Group”) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

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