Innovation In Digital Banking And Calculated Acquisitions Boost Growth And Margins

Key Takeaways

• Successful Suncorp acquisition and platform innovations expected to enhance revenue, market share, and net margins through increased efficiency and cost savings.
  
• Digital investments and AI-driven customer engagement initiatives position ANZ for improved growth and profitability in digital transactions and financial services.
  
• Regulatory scrutiny and technology investments may increase costs, while competition and economic uncertainties could challenge revenue and earnings growth projections.

Catalysts

Provides various banking and financial products and services to retail, individuals and business customers in Australia and internationally.

• The completion of the Suncorp Bank acquisition is expected to yield larger and earlier synergies than initially planned, enhancing scale and growth in Queensland, which should positively impact revenue and net margins.
  
• A significant shift towards a lower-cost, dual platform system with ANZ Plus and Transactive aims to improve efficiency, reduce costs, and allow faster roll-out of new products, which is projected to increase market share and positively impact net margins.
  
• The launch of ANZ Plus and the integration of financial well-being features, along with generational AI enhancements, could drive higher customer engagement and acquisition, resulting in increased revenue.
  
• The continued investment in digital platforms and payments innovation, including Transactive Global and ANZ Pay 2, positions the company to leverage increasing volumes in digital transactions, potentially enhancing revenue and profit margins.
  
• The strategic move to a simpler, automated operation with projected decommissioning of legacy systems from 2026-2028 is anticipated to bring substantial cost savings, contributing to improved earnings over time.

ANZ Group Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ANZ Group Holdings's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.4% today to 30.2% in 3 years time.
• Analysts expect earnings to reach A$7.0 billion (and earnings per share of A$2.36) by about November 2027, up from A$6.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.3x on those 2027 earnings, up from 14.3x today. This future PE is greater than the current PE for the NZ Banks industry at 13.3x.
• Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.05%, as per the Simply Wall St company report.

ANZ Group Holdings Future Earnings Per Share Growth

Risks

• Regulatory expectations and community scrutiny on the banking sector in Australia, as inferred from the company’s acknowledgements, could lead to increased compliance costs impacting net margins.
  
• The reliance on technology platforms such as ANZ Plus and Transactive, with significant investments, carries execution risk and could potentially delay cost-efficiency benefits from migrating customers and maintaining earnings.
  
• Intense competition within the retail banking space and pressure on maintaining net interest margins, particularly given the rise of broker-sourced loans, might impact revenue growth.
  
• Macroeconomic uncertainties, including interest rate changes and credit provisions, might unfavorably affect earnings given the bank's substantial lending and deposit operations.
  
• Integration and synergy realization from the Suncorp Bank acquisition may take longer than anticipated, potentially affecting anticipated cost synergies and revenue growth projections.

Valuation

• The analysts have a consensus price target of A$29.46 for ANZ Group Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$34.0, and the most bearish reporting a price target of just A$25.25.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be A$23.3 billion, earnings will come to A$7.0 billion, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 7.0%.
• Given the current share price of A$31.39, the analyst's price target of A$29.46 is 6.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.