ANZ Bank Net Jumps on Domestic Earnings; Smith Weighs Korea Exchange Stake

Australia & New Zealand Banking Group Ltd., the Australian bank expanding in Asia, said fiscal first-half profit jumped 36 percent as lending income grew and charges for bad loans fell in an improving domestic economy.

Net income in the six months ended March 31 surged to A$1.93 billion ($1.78 billion) from A$1.42 billion in the same period a year ago, the bank said in a statement today. Chief Executive Officer Michael Smith separately confirmed the lender is considering buying a 51 percent stake in Korea Exchange Bank.

After riding out the slowdown without state aid, Melbourne- based ANZ Bank and the nation’s largest lenders are now bracing for tighter regulation worldwide that may eat into profitability. As Smith mulls whether to pursue further acquisitions, he said this week’s downgrades of Greek and Portuguese debt may upset credit markets on which Australian banks rely to fund lending.

“The focus for the next 12 months will be on margins,” said Wim Steemers, Sydney-based analyst for Macquarie Funds Group. “The banks have talked about pressures on the cost of funding. We’ll learn over the next 12 months how that is flowing through the books.”

ANZ Bank dropped 1.9 percent to A$24.38 at 12:23 p.m. in Sydney, as the benchmark S&P/ASX 200 index lost 0.7 percent.

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Mike Smith, chief executive officer of Australia & New Zealand Banking Group Ltd. (ANZ), poses for a photograph during an interview in Sydney today. Close

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Mike Smith, chief executive officer of Australia & New Zealand Banking Group Ltd. (ANZ), poses for a photograph during an interview in Sydney today.

Underlying profit, which strips out some one-time costs, rose 20 percent to A$2.3 billion. Analysts estimated profit of A$2.26 billion, according to the average of four estimates compiled by Bloomberg. The net interest margin, the difference between what the bank earns from loans and pays to depositors, climbed to 2.43 percent from 2.22 percent in the same period a year earlier, the bank said.

‘Quite Worried’

Australia’s four biggest banks have justified raising interest rates by saying funding costs have climbed since the crisis made credit tougher to obtain.

“I am still quite worried about the global economy,” Smith said at a media briefing in Sydney today. “Europe is a mess. The uncertainty has continued and that’s probably going to get worse. The contagion issue is now very real.”

Stock markets worldwide fell after Standard & Poor’s on April 27 cut its rating on Greek bonds to junk status, and reduced its rating on Portugal. Australian banks rely on overseas markets for about 30 percent of their wholesale funding, according to the International Monetary Fund. That makes them vulnerable to a crisis because deposits at home leave a funding shortfall.

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The logo of Australia and New Zealand Banking Group Ltd. (ANZ) is displayed on information booths in the registration area of the company's annual general meeting in Melbourne, from December. Close

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The logo of Australia and New Zealand Banking Group Ltd. (ANZ) is displayed on information booths in the registration area of the company's annual general meeting in Melbourne, from December.

“Credit spreads are going to be volatile,” Smith said. “That’s where it will impact us.”

Corporate Demand

Deposits grew 2 percent while lending was broadly flat as growth in mortgages was offset by lower demand in its corporate and institutional businesses, ANZ Bank said.

Commonwealth Bank of Australia CEO Ralph Norris said yesterday he expected wholesale funding costs to rise for about another 12 months as the bank rolls over debt and refinances at post-crisis levels.

Westpac Banking Corp. and National Australia Bank Ltd. are set to report results next week, while Commonwealth Bank will release a quarterly trading update the following week.

The Reserve Bank of Australia, the country’s central bank, has increased interest rates five times amid an economic recovery. The government has already ended guarantees on wholesale funding put in place during the crisis.

Provisions for soured loans at ANZ Bank for the six-month period fell 21 percent to A$1.08 billion from a year earlier. Smith called that figure “adequate” because several borrowers have restructured loans and “there will always be something that crops up.”

Asian Expansion

The chief executive wants to turn the Australian lender into a pan-Asian group and last year agreed to buy Royal Bank of Scotland Group Plc units in Taiwan, Singapore, Indonesia, Hong Kong, the Philippines and Vietnam.

Smith today confirmed reports last week that ANZ Bank is considering bidding for the controlling stake in Korea Exchange Bank that’s being sold by Lone Star Funds. The 51 percent holding is worth about $4.1 billion, based on yesterday’s stock price.

“It would be remiss of us not to look at it,” Smith said. “There is absolutely no decision one way or the other. Korea is a major trading partner of Australia. The whole Asian strategy is geared very much around the key areas we wish to develop, which is also around our key trading partners. In many ways it would make sense.”

Standard Chartered Plc and HSBC Holdings Plc are among companies that have expressed an interest in buying the stake, the Seoul Economic Daily reported on April 21.

ANZ Bank’s Tier 1 capital ratio, a measure of its ability to absorb potential losses, was 10.7 percent as of March 31, little changed from 10.6 percent on Sept. 30.

To contact the reporter on this story: Angus Whitley in Sydney at awhitley1@bloomberg.net

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