ANZ misses the mark – drags the banking sector lower

The final trading day of October was a another negative one for the ASX capping off a negative month overall for the market with the ASX 200 down -1.18%. Today it was a weak earnings result from ANZ and surprise cut to the amount at which they’ll frank their dividend, more on this below however the stock ended down -3.26% to $26.74 to be the biggest index drag. The other banks were also down, although less so than ANZ, CBA-1.26%, NAB -1.11% & WBC off -1.19% + they did recover from session lows by the close of trade. There’s no sugar coating the result from ANZ today, it was weak on a number of levels and should provide the basis for underperformance for ANZ in the short term.

On the flipside today, the IT stocks were well bid in a soft market while our recent nemesis Costa (CGC) rallied by +8.37% to close at $2.85 today as we saw some good buying across the session, looked to be strong institutional interest – the rights (CGCR) also closed today at 67c.

End of month stats - sectors: At a sector level for the month of October, Healthcare was again strong while the IT stocks lagged. The ASX 200 index fell by -1.18%.

End of month stats - stocks: Wisetech (WTC) fell from grace over the month however there was also some wreckage across other names in that area, Afterpay (APT) + Jumbo( JIN) also feeling some heat. Of stocks we hold, Bluescope (BSL) did well.

Overall today, the ASX 200 closed down -26pts to 6663, Dow Futures are trading up +21pts / +0.08%

ASX 200 Chart

ASX 200 Chart

CATCHING MY EYE;

ANZ Bank (ANZ) -3.26%; the first of the banks to report this season and it certainly didn’t set the bar high.Net Interest Margin (NIM) decline accelerated in the second half, with the margin dropping 8bps as a result of increasing customer remediation as well as funding costs falling at a slower rate to lending rates. Income fell 1% as the home loan book struggles, and expenses rose 2% with compliance costs continuing to bite. There were some signs of life with the business lending growth of 10% in 6 months (if you need a business loan – go to ANZ for approval by the look!!) however this also drags NIM given the tighter market. Bad debts were flat half on half, however this masks rising past due loans in a sign credit is starting to be squeezed.

All this added up to a 5% fall in profit in the half, and a soft result. ANZ were able to keep their dividend however they did have to drop the franking amount to just 70% - the first time a dividend from ANZ wasn’t fully franked this millennium. A soft result, and rightfully hit on the back of it. Other banks were sold off however the main issues here are ANZ specific. Our ANZ position will likely be cut.

ANZ Bank (ANZ) Chart

Iluka (ILU) +6.7%; shares were higher on the release of their 3^rd quarter production report as well as announcing a review into the business. Iluka’s main operations in zircon and rutile continue to track well with production substantially higher than the previous quarter. The mineral sands, a group of key ingredients in tile manufacturing, market has been mixed however, but Iluka has been keeping a lid on costs helping sustain margins at this point. More relevant to today’s move however is the announcement the company will review its iron ore royalties. Iluka currently receive 1.232% of sales out of a BHP run iron ore mine South Flank. Production at the mine has been steadily increasing over recent years and BHP has now guided capacity higher from 2023 as the development continues, expecting a minimum yield of 135mtpa from 2023 onwards, up from ~55mtpa.

Iluka received $41m in the first half as a result of the royalties and even with factoring in a lower iron ore price in outer years, the royalties could be yielding a solid $100m+ a year. Today the company announced a review into the handling of the money from BHP with a number of options being assessed including a potential spin off sale. We have traded Iluka well in the past, however we’re not on this current move – one we have on the radar for weakness.

Iluka (ILU) Chart

Broker moves;

· Kiwi Property Cut to Underperform at Jarden Securities

· Codan Cut to Hold at Moelis & Company; PT A$6.40

· Codan Raised to Buy at Canaccord; PT A$6.70

· Costa Cut to Underweight at Wilsons; PT A$1.88

· Xero Rated New Outperform at RBC; PT A$80

· AGL Energy Raised to Hold at Morgans Financial Limited

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