Stocks In Focus: ANZ, August 27 2025

0:10G'day, I'm Scott Phillips, the Motley Fool's Chief Investment Officer in Australia, and welcome to another episode of Stocks in Focus. You know this by now, but this is the episode that goes both on the Motley Fool Money podcast, can't have a listen, can't subscribe, and the YouTube channel, can't have a watch, can't subscribe. That is simply youtube.com forward slash foolau and look for Motley Fool Money on the podcast player of your choice and subscribe to that as well. But this one goes in both of those places because we want to be good for your ears and good for your eyes, at least, well, maybe you don't leave it, maybe this bloke, Benny O.

0:43Benny, g'day. G'day, Scott. How are you doing today? Mate, I'm very well. Thank you. And thanks for joining us, mate. We are going to take a dive into a particular company with two quick comments upfront. Firstly, this is general advice only. If you're new to the Motley Fool, if you're new to financial advice, there's two types of financial advice, general and personal. Personal means we've thought about you, what your circumstances are, you've told us all about you, risks, objectives, volatility, tolerance, all that kind of good stuff. And we said, hey, we think this is right for you. We don't do that.

1:08We don't do personal advice because we don't know who you are. We do general advice. We say, this is what we think about an investment or an idea or a topic. And then you have to decide whether it's appropriate for your personal circumstances. If you need to, go and see a licensed financial advisor. So firstly, general advice only. Secondly, this is a point in time conversation. We're recording this one towards the end of October, August 2025. I'm already dating myself. If you are listening after August 2025, say in October or some other time, views may have changed, circumstances may have changed, anything could be different.

1:39So please be mindful. This is at a single point in time. We're long-term investors at the Motley Fool, though. You'll hear that towards the end. And so we are thinking about the long-term perspective and the long-term analysis in terms of the company's outlook and based on the current price, what we think. But it can only be at that point in time and until and unless things change from there. All right, Benny, that's me getting that boilerplate out of the way. It's important, but it's boilerplate. Let's go to a company everybody's heard of. Most of us have probably used at one time or another.

2:07That is ANZ Bank. I've got an ANZ Visa card, so there you go. I'm an ANZ customer. Mate, tell us, if you would, about ANZ Bank. Let's do the company first, and then we'll talk about the investment. So, ANZ Bank, so it stands for Australian New England Bank. Some of my friends used to call it Arns Bank, but it's actually pronounced ANZ. But essentially, it's one of the big four banks in Australia, and it provides the everyday banking services to your households, small businesses, corporates, governments. But there's three main segments that it kind of operates in. The first one is retail and commercial arm.

2:46And that's, like I mentioned, everyday home loans, deposits, you get your cards, and it's serving around like 11 million customers today. You've got the second segment, which is one of the strengths of the business, which is the institutional franchise. And that typically does like trade finance, foreign exchange. They're really big in payments and cash management, a bit of debt capital markets, and they're across Australia, New Zealand, as well as the Asia Pacific. And then you've got the New Zealand Bank, that's just a full service banking in that region. And it recently completed the acquisition of Suncorp Bank, and that was completed in July last year.

3:22The acquisition was actually first announced a few years back, two years, I believe, in 2022. So there was a bit of a delay, a bit of an approval process. It was initially blocked by the regulators, but then ANZ appealed it, won it, and now it has trying to integrate Suncorp into its organisation. But it essentially gives ANZ a bigger footprint in Queensland, more deposits, more retail customers. But like I said, the integration is currently underway. Another thing to point out, I'm not sure if you've got this as well, but then ANZ is trying to modernise its retail arm with a digital platform called ANZ+.

4:00so it's essentially to replace the legacy systems but it's trying to be built for faster approvals faster onboarding having a bit of a self-service digital experience but essentially the the management team reckons that it's going to be a lower cost to serve platform once it gets to scale but so far it's got a million over a million customers on this digital platform and it's actually attracting a lot of younger customers that are potentially more digital savvy and And lastly, I think worth mentioning, it's got a new CEO coming on board. His name is Nuno Matos. He succeeds Shane Elliott, who's been taking the front seat for over nine years.

4:42But essentially, Nuno has 30 years experience. He's worked in nine countries. So he's got really that global experience. But also that digital transformation experience, that's really what A &Z is trying to achieve at the moment. But he's an ex-HSPBC leader. He's ran HSBC in Europe, in Mexico, and he was most recently the wealth and personal banking division leader there. So a bit about him, but his mandate essentially to scale that digital platform we mentioned about to integrate the Suncorp Bank smoothly into the business. And there's a bit of a cultural reset that he's trying to achieve. But, yeah, he's got a big task ahead at the moment.

5:23There's a lot there, mate. culture, scale, size, obviously, digital transformations, legacy systems, which are wonderful when they keep competitors away, become milestones real fast, just ask Telstra. So a lot's happening there. Let's talk about the investment itself. And by the way, now you are watching and viewing this, I'm not going to ask Benny for a formal recommendation. This is our view of ANZ generally. I will ask him for the pros and cons of the investment. I will get him to speculate on whether he thinks it might be a market leader over the next five years, but it's not a formal recommendation.

5:51So putting that out there before we start this one, Let's go to the pros, mate. Why would some of our viewers and listeners consider buying shares in ANZ? First point I'll probably make is that with CBA, we know it's dominant in retail banking. NAB's dominant in business banking. But ANZ is actually really strong in institutional banking. It's actually a leader in that. And so I believe he recently got named the leading bank for customer relationships in Australia. And they've done that 16th time since 2005. So quite a strong franchise over there. But essentially banks, your corporates, your large instos across Asia Pacific, but they have multi-products.

6:27And that typically gives ANZ sticky relationships. But these products are typically more fee type income. So yes, it can be lumpy at times, but they do provide a cheaper, stable deposit base that the bank can utilize. But recent results show that the institutional business has been quite strong. and the market's income has been over a billion dollars. So that's the first point. The second point I'll probably talk to you is around that Suncult bank integration. On paper, it looks like there's scale benefits, synergies that can be extracted. So you can expect like duplicate costs to come out over time.

7:05So think about the systems. There's a lot of overlapping systems there. There's a lot of overlapping operations, overlapping branches, but it's actually a cross-selling potential where ANZ can actually sell into these Suncop customers. Think about your transaction cards, like Visa card that you mentioned, small business products. But the first full half of Suncop earnings have actually been captured in the results and they've actually seen loans and deposits step up since the acquisition. The third point I probably make too is probably around ANZ's capital position. It remains quite sound that potentially helps support dividends.

7:43So it's got the capital buffer, which is the CET1 ratio, which is what they call capital equity tier one ratio. That's sitting above regulatory minimums and sitting around, I think, just under 12%. So along with stable funding liquidity base, there's a kind of buffer for any shocks that can occur. And I think there's potentially room to keep paying shareholders dividends or potentially even share buybacks. But right now, I think there's a 5 % dividend yield, which could be appealing for income investors. Nice. That dividend franking on top of that as well. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

8:26Mate, so let's go to the cons then. These can be the risks, maybe reasons not to invest or maybe just risks to think about if you are going to invest, keep an eye on some of these things. What are the cons of an investment? What would you tell a bit of viewers, hey, if you're going to, just be mindful of these things? I think the first thing that comes to mind is probably around the pressure on margins and growth. So with potential rates cutting, the banks, all the banks are likely to see intense competition in lending, competition in deposits. So that's kind of really put pressure on margins, particularly for A &Z, who has already the lowest margins out of the big four.

9:01I think it's 1.5%, 1.56%, CBA, that's over 2%. So I think it has less buffer if that pricing gets tougher. And what we typically see is that with thinner margins, that kind of means slow profit growth. That's the first point. The second point I probably made too is probably, again, around that integration with Suncorp. There are risks to combining these two banks. It sounds great on paper, but it can get really messy and very costly and complex over time, particularly with all these legacy systems we just touched on before. It's going to merge systems, it's going to merge teams, people, culture.

9:37It could take longer than expected and can obviously cost more. And we might even see customers churn during this kind of migration phase. Third point I probably talk to is about that digital platform. There are execution risks on scaling that as well. ANZ really needs to avoid any missteps in execution to kind of win back any mortgage share in the industry. So it's obviously a quiet cycle to try to build that retail base, but it needs that ANZ plus digital platform to scale as well. So any delays or missteps there obviously means slower growth and potential elevated costs as well. Last point I probably want to harp on is probably AINZ is probably dealing with some kind of hybrid scrutiny from the regulators.

10:19The markets team has been dealing with an investigation over a past government bond transaction. They've also got an enforceable undertaking from APRA, the regulators, that's kind of requiring AINZ to strengthen its kind of risk compliance systems. So that's just in a nutshell about banks. They're just really highly regulated and ANZ is currently dealing with multiple rigorous overhangs. And this usually means more costs spent on controls, actual reporting, potential fines, legal costs, and management being distracted from running the actual business. So I think these are the main key risks and cons that I see with ANZ.

10:58And, yeah, there's a lot of execution risk involved. there is indeed so if you have a good list of pros a good list of cons i'm not sure where you're going to go with this so i'm going to ask you up front and i'll find out at the same time as our viewers and listeners do let's take a five-year view mate i said at the beginning we're long-term investors and uh a reminder to anyone listening or watching a long term is not 12 months not 18 months not two years long term is at least five years in our view to let a company's thesis play out and make sure that the price and value kind of tend to coalesce at some point that's kind of what we're thinking about we're thinking about being long-term investors so let's take a five year view, Benny.

11:32ANZ, from here, what do you reckon are the odds? Do you reckon it can beat the market from here or is it likely to lag behind the ASX? So if we just look at the current share price and evaluation, it's like near 10-year highs. It's trading around one and a half times book value, 15 times earnings. So not exactly cheap, potentially fair value. Earnings look steady but not really stellar. Probably can expect mid to low single digits earnings growth. so I think it's more of an income play rather than any kind of compounded growth play or story like I mentioned before net interest margins are likely to drift lower there's pricing walls for competition for mortgages deposits there's execution risk with a new CEO he's got a scale both Suncorp integration and a digital platform but so just overall I think ANZ could be good for income focused investors.

12:28But in my view, over the five years, I think it's unlikely to beat the market. There you go, Phil. You heard it directly from Benny. Hey, before you leave, very quickly, do me a favour. If you like what Benny had to say, and of course you did, he's been very thoughtful and insightful. I always enjoy talking to him about the companies he's looking at. Please do like the video because it's just good for our egos and helps other people find them, more importantly, actually. But also do me a favour, subscribe to the channel, hit the notification bell. That way when more content comes out. And if you listen to the other podcast, by we jump over to the YouTube channel.

12:55This episode in full living colour, plus stock of the month, what I've been reading, Motley Fool TV episode coming up, lots of great things due on the YouTube channel. So if you like what we're doing, hopefully you do, if you've made it this far, you hopefully do, do jump onto the YouTube channel, hit that like button, the notification and the subscription buttons as well. All right, that's it from us. Thank you for watching. Thank you for listening. Until next time, fool on. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only.

13:25Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services License 400691.