ANZ's CEO Michael Smith at the ANZ annual general meeting, Darling Harbour Convention Center, Sydney. 16th December, 2011. Photo: Kate Geraghty.

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.