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ANZ profit reveals rate plan clues

ANZ's CEO Michael Smith is under the pump to pass on the RBA's rate cut in full.

ANZ's CEO Michael Smith is under the pump to pass on the RBA's rate cut in full. Photo: Kate Geraghty

For those anxious to know how the ANZ plans to respond to the Reserve Bank's deep cut in official interest rates, today's earnings by the big four bank offer a pretty good indication.

ANZ's flagship Australian retail business, which has come under criticism for its round of out-of-cycle interest rate rises - including 12 basis points since February - saw profits fall away as funding costs started to bite into the lending book.

A dramatic shift occurred inside ANZ over the past six months to the point where its offshore operations and the one-time troubled institutional business provided the bank with a path for growth.

ANZ's Australian retail bank managed to return profit growth of just 1 per cent to $1.36 billion over the first half last year. Significantly, profit went backwards by 7 per cent compared with the September half.

Net interest margins - a key driver of profit - were crunched by 15 basis points on the March half, spurring by a drop in revenue.

For ANZ mortgage customers, the signs don't get any better, with the bank declaring the round of out-of-cycle interest rate rises pushed through late last year simply wasn't enough to offset the fall in margins. Yesterday's 50 basis-point cut by the Reserve Bank in its cash rate, though, should help reverse some of that.

The bottom line, though, has to be that record profits probably won't stop the ANZ keeping back some of that big rate cut when it announces its own interest rates on May 11 - as it sticks to its out-of-cycle rates reaction.

While ANZ's lending growth in Australia remains modest, though, the numbers don't give much evidence of an economy in distress.

Indeed, provision levels to cover soured loans were down 26 per cent from the March half last year, although they moved up a modest 4 per cent on the September half.

The 5 per cent increase in ANZ's group-wide cash profit of $2.93 billion for the March half, largely matched analyst expectations of $2.96 billion.

Asia tilt

For ANZ boss Mike Smith the story remains Asia, where profit of $419 million was up 8 per cent on the March half, but jumped a full 19 per cent from September.

Asia, though, still remains a hard place to generate profit. Average interest margins of 1.58 per cent are just a fraction of what the bank earns in Australia. Return on assets in Asia of 0.85 per cent are below Australia's average of 1 per cent. Cost ratios in Asia also remain high because of the bank's heavy investment spend as it ramps up operations.

Institutional banking, which was hit with large lending losses in recent years, increased 4 per cent from the same time last year. But the profit jump of 23 per cent from September was helped by a rebound in markets income.

Elsewhere, New Zealand put in a surprise performance with profit growing 10 per cent to $397 million over the March half with momentum picking up during September.

'Jaws'

ANZ was well on the way of meeting its goal of “neutral jaws” on the cost front for 2012. This is where the rate of costs at least matches the pace of expense growth.

ANZ has traditionally been a high-cost bank, but investors have tolerated this weakness given its ability to generate fast-paced growth in revenue.

Helped by a major round of job cuts in Australia, ANZ's cost growth of 3 per cent during the March half came below overall revenue growth of 4 per cent.

Investors are still seeing volatility on return on equity. In ANZ's case, it came in at 15.9 per cent for the half, down from 16.7 per cent this time last year.

This outcome puts ANZ behind bigger rival Commonwealth Bank, but is likely to see it outperform Westpac on shareholder returns.

19 comments so far

  • Next time you write a story like this can you include the proportion of funds the ANZ actually gets from the Australian market (compared to its OS funding...)

    The "out of cycle" movements might then make a little more sense to readers...

    Commenter
    Alex
    Location
    Geelong
    Date and time
    May 02, 2012, 11:33AM
    • Goal? Natural Jaws......hmm Sharks. Yep, I think they reached their goal. And funding cost, other than RBA, have gone down around the world.....they can borrow off Europe, Japan & the U.S. at next to nothing.

      Commenter
      Bazza
      Date and time
      May 02, 2012, 12:08PM
      • Old mate, have you heard of exchange rates? Do you think some risk is introduced when you have to pay back a loan in foreign currency? Is simplistic analysis the best analysis?

        Commenter
        wazza
        Date and time
        May 02, 2012, 12:48PM
      • The dollar has not moved that much over the past year & banks have this thing called hedging (you may of heard about it). They can also leave monies sitting O/S until time they believe it's profitable to bring back. Balls in the air & thousands of tricks.

        Commenter
        Bazza
        Date and time
        May 02, 2012, 1:42PM
    • For ANZ says Asia remains a hard place to generate profit. Reason: Asian debt market is competitive, Australian banks aren't.

      Time for the government to change regulations & allow Asian banks to compete in Australia.

      Commenter
      N0tR3allyz
      Location
      Sydney
      Date and time
      May 02, 2012, 12:17PM
      • That's great news. Nothing matters, nothing is above pure, fat profits. Thank you ANZ; as an Australian (but not for tax purposes) all I want to see is PROFITS IN MY POCKET.

        Commenter
        Daniel
        Location
        Liechtenstein
        Date and time
        May 02, 2012, 12:24PM
        • Agreed. If I take out a speculative loan, I want the bank to wear all the risk. I just want PROFITS IN MY POCKET.

          Commenter
          wazza
          Date and time
          May 02, 2012, 12:49PM
        • Sorry Daniel, but profit is not a dirty word. Without profit, the bank becomes unviable, and you'll be financing your own house and storing your savings under your pillow. Businesses won't be able to afford to finance their own operations, so they'll shut down, and the economy will stop. What is dirty though, is treating customers with contempt. No mercy from me there ANZ.

          Commenter
          X.
          Location
          G.
          Date and time
          May 02, 2012, 1:06PM
      • we know the rba means nothing , they can make rates at 1% but yet the banks control the outgoings. the pm full of hot air and so called swanie to .

        banks are the ones controlling this country housing market , i might be right or wrong but why are we having these problem in the julia era and not the howard times? did howard have the balls to go against them and put them in thier place

        Commenter
        dom
        Location
        melb
        Date and time
        May 02, 2012, 12:49PM
        • A simple cost volume profit analysis will show that banks are reducing fixed costs by cutting down staff levels and restructuring and exporting jobs to overseas call centers.By increasing margins they will make even more super profits which will go exponential as the volume of new loan increase.This is being proven by the half year results.

          Commenter
          bank bullshit
          Location
          castle hill
          Date and time
          May 02, 2012, 12:54PM

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