ANZ's investment spend too high, says Deutsche

Deutsche Bank issued a note on ANZ on Friday, following ANZ's announcement of a A$1.5 billion investment in the productivity of its Australian banking operations, saying that the investment would generate only small savings and it was unclear what revenue benefits would flow from it.

ANZ will spend the money over the next five years updating branches, introducing video-conferencing facilities into remote branches, developing new mobile applications, trialling a mobile wallet and introducing "next generation" ATMs.

Deutsche's banking analyst, James Freeman, said the program would produce cost savings of around $50 million a year over the next five years. "The price tag is higher than we would have expected," he said.

"While the investment spend will be diverted from the existing budget, with no incremental spend, it is still high considering the fairly limited benefits we identify. ANZ needs to do more to control costs."

Freeman said revenue benefits from the program were hard to identify.

"Clearly the focus on electronic banking platforms aims to capture a larger share of online banking traffic but these revenue benefits are difficult to quantify and peers are likely to follow suit."

Deutsche has estimated that ANZ's Australian retail bank earnings will increase by an average of 1.4 per cent a year from 2013 to 2017, as a result of the program. The contribution to group earnings will see an increase of 0.28 per cent over that period.

Despite its misgivings, Deutsche has maintained a Buy recommendation on ANZ.

One of the big savings from the program will be a reduction in branch costs, as the bank closes some branches and moves others to smaller sites employing fewer people.

Freeman has estimated that ANZ will reduce its branch numbers by three per cent - about 24 branch closures a year - over the next three years.

"While branches will continue to be an important distribution channel for ANZ in terms of customer acquisition and for complex transactions, we believe there are real opportunities to reduce the number of branches given the increased move towards electronic banking," he said.

In its presentation last week, ANZ said branch transaction numbers have fallen from around 4.7 million a month in 2008 to the current level of less than four million a month. Internet banking activity has grown strongly over the same period.