ANZ delivers on the cost front as it shifts into testing times

  • By Christine St Anne

ANZ reported a flat cash profit of $6.6 billion for the full year, underpinned by customer remediation costs, low credit growth and reduced earnings due to low interest rates. 

Final dividend was also flat at 80 cents per share –   partially franked at 70 per cent. 

Net interest margin fell 8 basis points to 1.72 per cent, compared to the first half. 

As expected, remediation costs grew to $1.6 billion, including a $559 million cost announced in October.

Bad debts rose 17 per cent to $795 million.

ANZ said that while housing loans past due in Australia stabilised in the most recent quarter, the bank remains cautious given credit losses remain at historically low levels. 

Bottom line, the results met expectations, according to Morningstar bank analyst Nathan Zaia. 

“Interest income was soft but offset by really good cost control. They have done a really good job in cutting down the underlying costs to offset pressures from the regulatory and compliance costs.,” he said. 

Underlying costs were down 1.6 per cent.  

For Zaia, the second half results were consistent with the same trends that emerged in its first half result. 

“The composition is a little bit weak. Their core Australian banking business really not doing that well. It is the institutional business’ bumper first half that really saved this result.”

Its institutional business reported revenue of $5.2 billion up five per cent from the first half. In comparison the revenue for the retail business was down $590 million. 

He sees “green shoots” in the bank reporting a lift in home loan applications –following it “Offer So Good” campaign which offered Qantas points to potential borrowers. 

The bank also focused on making the home loan application process easier. 

“It just shows how important it is to have appropriate risk settings and close to if not market leading approval turn around times because brokers get paid based on how much business they are writing and loans settling. 

“If they are getting pushback from a bank, they will move to another bank that they have greater confidence in getting the loan approved quickly. 

“The rise in application volumes is a good sign that the brokers almost forgiven them and re coming back. 

“We will have to wait to see [in the APRA numbers] if these home loan applications will actually convert in an increase in loans.” 

Bank creditworthiness sound 

Both rating houses Moody’s and S&P acknowledged a number of positives in ANZ’s full year result given the challenged outlook of low growth and low rates. 

Despite the difficult operating conditions, S&P believes that ANZ’s creditworthiness remains strong by global comparison. 

On the capital front, ANZ expects capital levels will remain strong and credit losses at low levels, supporting the bank's creditworthiness. 

ANZ’s Common Equity Tier 1 Capital Ratio was stable at 11.4 per cent and around $3.5 billion above the APRA’s ‘unquestionably strong’ measure. 

This will be key as analysts will be watching how New Zealand’s revised capital changes will impact the lender – given its large business exposure in the country. 

“We forecast that ANZ will maintain a risk-adjusted capital ratio of 10.25 per cent to 10.50 per cent in the next two years,” S&P said. 

“In addition, capital changes proposed by the Australian and New Zealand bank regulators suggest that there would be some upside pressures to ANZ's capital in the next few years. 

“Furthermore, we expect that credit losses will remain low in our base case, notwithstanding pressures on home loan arrears in some pockets within Australia as well as our view that still elevated property prices and high household debt continue to pose tail risks.”

According to Moody’s vice president Frank Mirenzi, ANZ posted healthy results for fiscal 2018 - with it net interest margin benefiting from lower marketing funding costs.

“However, revenue and profits in its main Australian retail business have contracted, and we expect lower lending interest rates – absent further reductions in market funding costs – will further dent group revenue and profits in fiscal 2020,” Mirenzi said.