Equity ResearchAustralia & New Zealand Banking Group LtdCurrent Price $31.49 - Outperform

Junaid Farooq– Research+ (61) 405 154 351junaidfrq@hotmail.com

1 Price History Fundamental Appraisal December 2014

Stock Statistics:Current Price: 52-Week High/Low $35.09 / $28.84Percent Off High: 10.30% Avg Volume/ Month: 6,057,247

Market Cap (million) $86,806.92EPS 2014: $2.67EPS 2015E: $2.66Dividend Yield: 5.49%Dividend Ex-Date: 05/08/2015

Company BETA: 1.36 Industry BETA: 1.39 Sector BETA: 1.38 ROE: 15.65%

2 Macro drivers

• Industry size ~ $181 billion AUD with an average annual revenue growth rate of 1.1% where big four banks accounts for approximately 85% of total revenue. (IBISWorld)

• Total Australian banks credit growth of 5.4% over the year to September is strongest since February 2009• During GFC credit growth plunged to 1-2% from 14-15% Compared to US banks• whose credit growth declined from 10% to a staggering -9% during GFC• Quantitative Easing artificial low interest rates are now:

Driving up collateral asset values triggering write back gains Reducing the interest burden for borrowers thus reducing the emergence of new impaired loans

• Australian banks’ impaired assets continue to decline.

3 Micro drivers

Credit growth cycle:• Net loans and advances growth decreased by 2% to 8% (10% in 2013)primarily due to decrease in housing lending growth of 1% to 6% (7% in 2013)• Customer deposit growth also decreased to 9% in 2014 compared to 12% in 2013. (Total Major banks deposit doubled post GFC).• Medium credit growth with strong competition. Low rates are a catalyst toexcessive global liquidity.• Corporate credit demand stays low. Businesses continue to deleverage;Resulting in slow credit growth and falling loan margins.• Home loan portfolio increased by 8.3% over the 5 years.• In 2004 ANZ completed the $4.9 billion acquisition of The National Bankof New Zealand along with $3.6 billion rights issue. (Net profit increased by 14% in 2004 compared to 7% increase in 2003).

Macro drivers December 2014

• Australian major banks dividend yield looks attractive compared to broader market and bond yield • Australian and Canadian banks able to maintain ROE between 10-15%. US, UK and Japan major banks had ROEs ranging from -5 to -10% during

GFC. Currently they are managing to keep it between 1-9%.• While most of the global large banks nonperforming loans continue to decline; Eurozone continues to increase.

Source: CompanyFY00

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ANZ Credit Growth

Micro drivers December 2014

Net Interest Margin• Net interest margin continue to decline• ANZ aspiration is to have 25-30% group profit from Asia Pacific, Europe and America revenue by 2017… Currently at 23%

Cost to Income Ratio• ANZ targeting a below 43% cost to income ratio by FY16 … currently at 45%.• Decreasing by 80bps during 2014.• FY14 snapshot:5% revenue growth, 3% expense growth and an 18% reduction in provisions

Asset Quality• Bad debts continue to decrease. • Credit quality continue to improve as gross impaired assets decreased from 18% FY13 to 32% FY14.• Retail deposits at 63% in FY14 compared to 62% in FY13.• Whole sale deposits accounted for 29% in FY14 compared to 30% in FY13.

Source: CompanyFY00FY01FY02FY03FY04FY05FY06FY07FY08FY09FY10FY11FY12FY13FY14

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ANZ Cost to Income Ratio

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0.70%

Bad debts as % of total gross loans and advances

Source: Company

4 Historical Valuation Perspective December 2014

VALUE: Australia & New Zealand Banking Group Ltd is currently overvalued.

• Primary valuation ratio, Price to earnings ratio shows a strong correlation with the share price an if follow projected P/E ratio; share price will decrease• Secondary valuation ratio, Price to book ratio also shows a strong correlation with the share price but is inversed after FY13.• ROA and ROE also holds strong correlation with share price.

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ANZ Price to Earnings Ratio

Share Price LHS

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ANZ Price to Book Ratio

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0.00%

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0.80%

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ANZ ROA

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ANZ Return on Equity

Share price LHS

ROE RHS

710%Thematic drivers & Fundamental Health

63%Competitive Environment45%Size/Neglect/Asset Value87%Growth610%Value

Investment Theme Barometers

730%Micro Drivers935%Macro Catalysts

Fundamental Drivers 100% 75%

Confidence in decision process

Weight Score Points

75%Confidence Level

$18,200Stop Level

6Time Frame (months)

¥21,000Target

¥19,810Entry Point

Trade Parameters

The fundamental drivers scored well at 75% out of a possible 100%. The main catalyst to Australia & New Zealand Banking Group Ltd is the combination of macro factors along with credit growth, net interest margin and asset quality. Another catalyst to reported earnings is the decreasing loan loss provision.

Summation of confidence in decision process

5 Predictability & Confidence Gauge December 2014

BUY NEUTRAL SELL

Fundamental Catalysts scored 75%confidence in decision…out of 100%.

RESEARCH EVALUATION RISK RANKING: Medium

The more the red the less the

predictability

31.5%21%

6%5.6%2%

1.8%7%

ANZ Share price history