Understated Factors To Consider Before Investing In Australia and New Zealand Banking Group Limited (ASX:ANZ) – Simply Wall St

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As a large-cap stock with market capitalization of AU$81.62b, Australia and New Zealand Banking Group Limited (ASX:ANZ) is classified as a major bank. As these large financial institutions revert back to health after the Global Financial Crisis, we are seeing an increase in market confidence, and understanding of, these “too-big-to-fail” banking stocks. Following the crisis, a set of reforms termed Basel III was enforced to bolster risk management, regulation, and supervision in the financial services industry. These reforms target banking regulations and intends to enhance financial institutions’ ability to absorb shocks resulting from economic stress which could expose banks to vulnerabilities. ANZ operates predominantly in AUD and is held to stringent regulation around the type and level of risk it can take on, exposing it to higher scrutiny on its risk-taking behaviour. Investors are viewing ANZ with a more cautious lens and analysing these stocks using bank-specific metrics such as liquidity and leverage. Today we’re going to take a look at these metrics to gain more confidence investing in the stock. Check out our latest analysis for Australia and New Zealand Banking Group ASX:ANZ Historical Debt June 30th 18

Why Does ANZ’s Leverage Matter?

Banks with low leverage are exposed to lower risks around their ability to repay debt. A bank’s leverage can be thought of as the amount of assets it holds compared to its own shareholders’ funds. Though banks are required to have a certain level of buffer to meet its capital requirements, Australia and New Zealand Banking Group’s leverage level of 15.72x is significantly below the appropriate ceiling of 20x. This means the bank has a sensibly high level of equity compared to the level of debt it has taken on to maintain operations which places it in a strong position to pay back its debt in unforeseen circumstances. If the bank needs to firm up its capital cushion, it has ample headroom to increase its debt level without deteriorating its financial position.

How Should We Measure ANZ’s Liquidity?

As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up the bank’s total assets. Generally, they should make up less than 70% of total assets, which is consistent with Australia and New Zealand Banking Group’s state given its ratio of 62.98%. This is a reasonable ratio and suggests that slightly over half of the bank’s total assets are tied up in the form of illiquid loans, striking an appropriate balance between liquidity and interest income.

What is ANZ’s Liquidity Discrepancy?

A way banks make money is by lending out its deposits as loans. These loans may be fixed term and often cannot be readily realized, however, customer deposits are liabilities which must be repaid on-demand and in short notice. This mismatch between illiquid loans and liquid deposits poses a risk for the bank if unusual events occur and requires it to immediately repay its depositors. Relative to the prudent industry loan to deposit level of 90%, Australia and New Zealand Banking Group’s ratio of over 95.57% is higher, which positions the bank in a risky spot given the potential to cross into negative liquidity disparity between loan and deposit levels. Essentially, for A$1 of deposits with the bank, it lends out more than A$ 0.9 which is risky.

Next Steps:

The bank’s prudent management of its risk levels is reflected in its sensible leverage and liquidity ratios. This means it is well-placed to meet its financial obligations in the case of any adverse and unpredictable macro events. Keep in mind that a stock investment requires research on more than just its operational side. Below, I’ve compiled three essential aspects you should further research:

  1. Future Outlook: What are well-informed industry analysts predicting for ANZ’s future growth? Take a look at our free research report of analyst consensus for ANZ’s outlook.
  2. Valuation: What is ANZ worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether ANZ is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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