A messy result as ANZ shape shifts

ANZ Bank has logged a $3.41 billion first-half cash profit on the back of lower bad debts and lower costs. But the banking giant's agressive attack on operating expenses and loan losses failed to placate investors who were upset with the weak revenue growth and knocked 2.1 per cent off the share price in the immediate aftermath.

Chief executive Shayne Elliott said that the result reflected the reshaping of the bank which has seen it get rid of lower-returning assets to focus on its core Australian business.

The lender has sold stakes in Shanghai Rural Commercial Bank and retail and wealth management arms in six Asian countries.

"We saw significant financial benefits emerging from the strategic and tactical decisions we took in 2016 to simplify the business, improve productivity and increase capital efficiency," Elliot said.

The interim cash profit - which was up 10 per cent up on the $3.10 billion posted for the September half came in below consensus forecasts of $3.5 billion, prompting analysts to gripe that the result was ‘messy’ and difficult to compare with previous periods.

“There are a lot of lumpy items in this result,” UBS analyst Jon Mott said in a note to clients. “The key message is that underlying revenue was weak as the company strengthens its balance sheet at the expense of earnings power.”

Mixed outcome

Bell Potter’s TS Lim continued in the same vein saying the consensus data for reported and cash earnings should not be relied upon due to the number of moving parts with 'specified items'.

Lim added that ANZ has removed items like capitalised software but added back some Asian assets and then reclassified others as “held for sale”. In his view, the mixed outcome could spook the market.

Headline revenue was flat at $10.3 billion. But after stripping out accounting changes for the sale of Asian Retail & Wealth and the Shanghai Rural stake together with credit value adjustments and funding valuation adjustments plus the gain on the sale of Queen Street Building in Melbourne, ongoing revenue fell 1.5 per cent on the half.

Specifically, interest income slipped 1 per cent, but costs dropped 2.3 per cent, excluding restructuring charges.

Still, despite the encouraging news on the expenses front, Elliott acknowledged that ANZ had “fallen behind a bit” with revenue growth because of the intense competition. But he told analysts the bank was now in a position to grow marginally above system.

However, his comments displayed considerable caution.

"The environment for banking remains constrained with intense competition and pressure on margin, subdued lending growth, rapidly changing customer expectations and increasing regulation," he told analysts.

"In my view we face one material headwind and that is lower domestic credit growth. Credit growth of around 6 per cent driven almost exclusively by housing coupled by wage growth of around 2 per cent is not desirable or sustainable.

"It is the lack of wage growth despite low unemployment that is the current concern and its potential impact on consumer spending and business investment."

By the numbers

The ANZ chief was at pains to point out the improvement in credit quality. The lender’s total provisions for bad and doubtful debts was $720 million, down 30 per cent on the half.

Plus, he said the outlook for the second half remained broadly stable on the back of improved credit quality and lower provisions for bad debt.

Further, he noted the core commercial and retail operations in Australia and New Zealand had delivered a solid performance despite the regulatory clampdown on lending to housing investors.

“We are growing prudently in home lending in Australia concentrating on owner-occupiers, and through a focus on the small business segment.”

Net interest margin came in as expected by falling 6 basis points to 2 per cent. This, despite rate hikes during the period under review.

The banking giant's tier one capital ratio rose from 9.8 per cent to 10.1 per cent - the first time the ratio has been above 10 per cent. Return on Equity rose to 12.5 per cent, the first "material” increase since 2010, the bank said.

“ROE continues to climb despite being top heavy in capital and ANZ continues to push quality improvements in Institutional banking,” added Lim. “This remains a work in progress and the bank remains the best capitalised of the majors ahead of higher mortgage risk weights.”

Elliott said total risk weighted assets for the Institutional bank have dropped by $23 billion dollars during the past 12 months, expenses have fallen 9 per cent and returns have increased.

"These results show we are creating a very different bank," he said.

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