ANZ Bank Second-Half Profit Misses Estimates as Trading Income Drops

Australia & New Zealand Banking Group Ltd. (ANZ), the worst performer among Australia’s four largest bank stocks this year, posted second-half profit that missed analyst forecasts after volatile markets eroded trading profit.

Net income in the six months ended Sept. 30 rose 4.3 percent to A$2.69 billion ($2.78 billion) from A$2.58 billion a year ago, the Melbourne-based bank said in a statement today. The median estimate of four analysts surveyed by Bloomberg News was for profit of A$2.78 billion.

Chief Executive Officer Michael Smith is among Australian banking heads facing the weakest demand for mortgages in three decades. While this week’s central bank interest rate cut is “good for people’s state of mind,” confidence will remain “very fragile” amid Europe’s debt crisis, he said. To offset weakness at home, Smith has invested in Asia, from where he plans to double the bank’s proportion of profit by 2017.

That “can become a little harder to do when the macro environment is deteriorating around you,” said Angus Gluskie, who oversees about $359 million at White Funds Management Pty. in Sydney. “Costs continue to escalate” and interest margins “deteriorated slightly” in the second half, he said.

ANZ Bank shares fell 2 percent in Sydney, extending this year’s decline to 12.3 percent. That’s the second-worst performance on the six-stock S&P/ASX 200 banks index, which has lost 4.7 percent this year.

Full-year net income rose 19 percent to a record A$5.36 billion, the bank said. The median forecast of analysts surveyed by Bloomberg News was for A$5.47 billion.

Global Turmoil

Turmoil in the global economy triggered more cautious consumer and business sentiment and higher funding costs, a situation that is “likely to be with us for some time,” Smith said in a media statement. In the fiscal second half, “the global economic situation saw trading conditions for our markets business deteriorate significantly,” he said.

Income from the bank’s so-called global markets unit, which includes its fixed income, commodities and capital markets, trading and balance sheet operations, slid 31 percent to A$637 million in the second half from A$919 million in the previous six months.

Westpac Banking Corp. (WBC), Australia’s second-largest lender, yesterday posted a 13 percent decline in second-half profit as lending growth slowed and debt market turmoil triggered a drop in earnings. National Australia Bank Ltd. (NAB) said last week that profit in the period rose 31 percent as it won a bigger slice of the nation’s mortgage market with discounted loans.

Rate Cut

Demand for lending may increase after Reserve Bank of Australia Governor Glenn Stevens lowered the overnight cash rate target on Nov. 1 by a quarter percentage point to 4.5 percent following the nation’s core inflation rate dropping to the weakest in 14 years.

ANZ Bank, Westpac and Commonwealth Bank of Australia (CBA), the nation’s biggest lender, lowered their variable mortgage rates this week by the same amount as the central bank’s reduction. National Australia reduced its variable rate by 20 basis points, or 0.20 percentage point.

ANZ Bank’s group net interest margin slid in the six months to Sept. 30 to 2.44 percent from 2.47 percent in the previous six months. Operating expenses for the full year rose 10 percent to A$8.02 billion.

As of Sept. 30, the bank’s staff count rose 4 percent to 48,938 from 12 months earlier. By contrast, staff numbers declined at Westpac and National Australia in that period.

Four-Pillar Banks

ANZ Bank will “respond to the environment with a stronger emphasis on generating ongoing efficiencies given the more constrained domestic conditions,” Smith said today.

That call “is overdue and needs to be executed effectively,” Melbourne-based Citigroup Inc. analyst Craig Williams said in a note to analysts today. He rates ANZ Bank “neutral.”

Australia’s four-pillar banks, so named for a law that prevents them buying each other, are competing in a weakening mortgage market, after the central bank boosted borrowing costs seven times between October 2009 and November 2010 to the highest rate in the developed world.

The rate gains damped household appetite for debt, which more than doubled in the past 15 years as a proportion of disposable income to 154 percent in the quarter ended June 30, according to central bank figures. That’s higher than the 133 percent ratio Americans accumulated at the height of the U.S. subprime-mortgage boom.

Credit Growth

Credit to home buyers rose 5.8 percent in September from a year earlier, matching the previous month’s gain, which was the lowest annual increase since 1977, when central bank data begins. That’s almost a third of the average monthly pace recorded in the decade ending December 2009.

Credit growth will be “somewhat similar” in the bank’s current fiscal year, Smith told reporters today in Melbourne.

ANZ Bank’s second-half net interest income, or revenue from borrowers after deducting interest paid to depositors, rose 3 percent from the previous half year to A$5.84 billion. Provisions for credit impairments declined 17 percent to A$562 million in the half from the previous period, the bank said.

The bank will pay a second-half dividend of 76 Australian cents, taking the full-year payout to A$1.40 a share, 11 percent higher than for 2010.

To contact the reporter on this story: Jacob Greber in Sydney at jgreber@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.