ANZ Group’s (ASX: ANZ) first-half fiscal 2026 profit jumped 14% to $3.8 billion compared with the second half of last year. The bank’s material cost-cutting program underpinned the result, with operating expenses down 9%. Interim dividend is steady at $0.83 per share, 75% franked.

Why it matters: ANZ expects fiscal 2026 operating expenses to be 5% lower than last year, compared with 3% previously. Our fiscal 2026 profit forecast is lifted modestly, as much of the uplift comes from foreign exchange benefits, which are largely offset by lower interest income.

  • It is still too early to assess success in improving customer experience and driving revenue growth, but the need for improvement is clear, given the bank’s lackluster 1% loan growth, plus a modest 1-basis-point decline in net interest margin to 1.53%, producing flat net interest income.
  • Home loans grew well below 3.5% industry growth in the half. We expect a return to market growth rates of 3% in fiscal 2027, supported by an improved digital offering, faster loan approval times, and an increase in the number of home and business lenders.

The bottom line: We maintain our $33 fair value estimate for wide-moat ANZ. Shares are modestly overvalued. ANZ trades on a P/E of 14 and offers a dividend yield of 4.6%, 75% franked.

Big picture: Our fiscal 2028 forecasts are generally consistent with ANZ’s mid-40% cost/income target, down from 49% in the half, and return on tangible equity of 12%. We expect benefits from removing duplicated technology system costs and greater process automation.

Between the lines: Like peers, ANZ lifted provisions/loans by 4 basis points, with actual credit stress still very low, but recognizing more defaults were increasingly likely as the Middle East conflict disrupts supply chains, pushes up costs, and weighs on consumer confidence.

  • Including changes to provisions, bad debt expenses/loans are very low at 7 basis points, well below our medium-term expectation of 17 basis points.

ANZ Group needs to hold market share and deliver margin and efficiency improvement

ANZ Group is the owner of ANZ Bank, the smallest of Australia’s four major banks by market value and the largest bank in New Zealand and the Pacific, offering a full range of banking and financial services to the consumer, small business, and corporate sectors. Like the other major banks, ANZ Bank has a well-recognized and trusted bank brand, a large advertising and marketing budget, and customer fulfillment capacity (branches, systems, funding capacity) to capitalize on this brand equity. We see the firm’s strategy to simplify and focus on its highly profitable core banking operations as logical. The acquisition of Suncorp Bank provides an avenue to leverage benefits of current investments in its retail banking platform. These investments include better digital offerings and more lenders. Integration risk can not be ignored, but overall we believe the acquisition is strategically sound.

Tight underwriting standards, lender’s mortgage insurance, low average loan/valuation ratios, a high incidence of loan prepayment, full recourse lending, and a high proportion of variable rate home loans, combine to mitigate potential losses from mortgage lending.

The main current influences on earnings growth are modest credit growth, with households and businesses adjusting to lower borrowing capacity after a sharp increase in rates and slowing economic growth. Businesses are expected to be more cautious on making large investments as households rein in discretionary spending. Margins fell as banks competed aggressively in a low credit growth and high refinance market, but margins have stabilized, and we expect competition to be rational in the medium term. Operating expenses are being cut to improve the bank’s productivity relative to peers, with an emphasis on being more competitive across its digital offerings—namely home loans and savings.

In Asia, ANZ Bank targets large clients and has walked away from lending to small business. Given that ANZ Bank would have no competitive advantage against local (and much larger) lenders, we support the revised strategy.

Bulls say

  • ANZ wins market share in home loans and retail customer deposits after rolling out an improved digital offering.
  • A large institutional client base and geographic footprint leaves ANZ well placed to support customers transitioning to net zero and moving supply chains in response to US tariffs.
  • Nonbank lenders and even nonmajor banks reliant on wholesale funding and equity markets cede market share back to the major banks in a rising rate environment.

Bears say

  • ANZ Bank sinks money into new systems but remains subpeer on returns on equity, cost efficiency, and net interest margins.
  • Sourcing more funding from institutional customer deposits, which are more price-sensitive, ANZ has less margin upside from higher interest cash rates than major bank peers.
  • After acquiring Suncorp Bank, issues with loan processing and integration result in the bank ceding market share and spending more than originally guided on integration.