ANZ Bank is facing softer revenue growth as stiff competition for big corporate customers and low volatility drag on earnings in its institutional banking arm.
The country’s third largest bank on Friday reported 8 per cent growth in cash earnings to $5.2 billion in the first nine months of its financial year, a result helped by currency movements, strong cost control and further declines in bad debts.
The performance was slightly weaker than expected, with analysts saying this was partly because of its exposure to the competitive Asian banking market. Conditions in domestic business lending were also soft and trading income was hit by very low levels of volatility.
The bank said it was on track to hit full-year targets of 4 to 5 per cent revenue growth, albeit at the bottom end of the range.
After the Commonwealth Bank also reported a slowdown in banking income growth in its $8.7 billion profit this week, ANZ said revenue was "a little softer" and interest margins were “slightly lower” than three months ago.
Against this, it is containing costs more aggressively than it forecast and provisions for bad debts are falling faster than expected.
Chief executive Mike Smith said the bank was performing well but conceded sections of the Australian economy were "softer than expected" and margins were narrowing slightly.
“It has been quite a tough period and of course there has been some margin compression. That has continued, it really is a result of competition and that's been across the board," Mr Smith said in an interview on the bank's website.
ANZ shares dropped as much as 1.5 per cent in early trade but the decline had moderated to 0.6 per cent in early afternoon, when the stock was trading at $32.55.
Macquarie analyst Mike Wiblin described the trading update as "pretty soft" and said the bank was subtly toning down its guidance by adding the disclaimer that it was subject to economic conditions.
"It's softer than we expected, obviously affected by weakness in global markets," said Mr Wiblin, who has an "underperform" rating on the stock. "We continue to be concerned about the slowdown in Asia."
At its latest half year results, investors viewed ANZ’s capital levels as a weak point after its "tier-one" capital ratio fell 15 basis points to 8.3 per cent, leaving it with the lowest capital ratio of the big four. On Friday the bank said its capital position had improved by 20 basis points in the third quarter and it would rise above 8.5 per cent by the end of the year.
An ANZ investor, White Funds Management managing director Angus Gluskie, noted the softer trading income but said this could easily bounce back. He said the margin contraction, likely a couple of basis points, would need to be sustained to become a more serious concern for investors in the bank, which is pursuing expansion in Asia.
“Investors recognise that ANZ carries higher risk because of that Asian exposure,” he said. “So every time it goes a bit softer, that’s a reminder that that risk exists.”
Domestically, ANZ has been expanding ahead of the market in home lending for the past 18 months but it is still heavily exposed to the softer business banking market. Customer deposits were up 8.3 per cent compared with a year ago and loans were up 5.8 per cent.
While margins in institutional lending are being squeezed by very low interest rates, the same forces were helping to contain provisions, it said, and conditions were gradually improving.