ANZ Banking Group Posts Weakest Profit Growth in 2 ½ Years

ANZ Bank CEO Michael Smith
Michael Smith, chief executive officer of Australia & New Zealand Banking Group Ltd. Photographer: Qilai Shen/Bloomberg

Australia & New Zealand Banking Group Ltd., the worst performer among Australia’s four largest banking stocks this year, posted the smallest half-yearly profit increase in 2 ½ years as lending profitability slipped.

Net income in the six months to March 31 gained 3 percent to A$2.66 billion ($2.91 billion) from the previous six months, the Melbourne-based bank said today, as provisions for bad debt dropped. Profit missed the A$2.77 billion median estimate of six analysts surveyed by Bloomberg News.

Chief Executive Officer Michael Smith, 54, aims to double profit from Asia to 30 percent in the next seven years as he expands in the region. The bank shares declined the most in more than ten weeks after net interest margin, a measure of the profitability of its lending business, shrank to 2.47 percent.

“The bad-debt charge is going down but there’s no growth in overseas deposits and the net interest margin is falling,” said Brett Le Mesurier, an analyst at BBY Ltd. in Sydney with a “buy” rating on ANZ Bank. “ANZ used to be a high-growth option. The evidence isn’t there to support that now.”

The shares slipped 2.1 percent to A$23.80 in Sydney trading. They have gained 1.9 percent this year, lagging behind National Australia Bank Ltd.’s 14 percent rise and Westpac Banking Corp.’s 11 percent increase. National Australia Bank and Westpac are set to publish first-half earnings this week.

‘Flat Spot’

“Parts of the Australian economy have hit a flat spot with consumers and businesses becoming more conservative,” Smith said in today’s statement. “We are starting to see the effects of a structural change underway as the Australian economy continues the shift toward being based much more on hard and soft commodities. One of those changes is the stronger Australian dollar which has impacted our international earnings.”

First-half underlying profit, which excludes some acquisition costs and information technology spending, climbed 23 percent from a year earlier to A$2.82 billion. Net income in the period climbed 38 percent from the same period a year ago.

ANZ Bank’s first-half net interest income, or revenue from borrowers after deducting interest paid to depositors, gained 8 percent from the year earlier period to A$5.65 billion. Provisions for credit impairments in the first half dropped 38 percent to A$675 million.

Deposits at ANZ Bank’s retail Australian business rose 7 percent from Sept. 30, and retail lending increased 4 percent, the bank said. Deposits from clients in Asia, Europe and the Americas shrank 1 percent in the half, while lending rose 1 percent from the previous six months.

Shrinking Margin

The bank’s net interest margin was 2.47 percent in the first half, down from 2.5 percent in the preceding six months.

Smith said while the bank has reduced its reliance on wholesale funding markets, costs are unlikely to fall.

“Credit markets are still very volatile and Australian banks are dependent on credit markets,” Smith told reporters at a briefing today in Sydney.

Australia’s four largest banks, all rated Aa1, are being reviewed by Moody’s Investors Service, which said in February that their reliance on global debt markets to fund lending is a concern.

ANZ Bank’s Tier 1 capital ratio, a measure of its ability to absorb potential losses, was 10.5 percent at March 31, up from 10.1 percent on Sept. 30.

Raising Rates

Australian lenders are confronting a slide in demand for lending after central bank Governor Glenn Stevens led Group of 20 policy makers by boosting borrowing costs in seven quarter percentage-point steps between October 2009 and November to 4.75 percent.

The Reserve Bank of Australia’s most recent quarter-point increase in November was followed by larger rises in the standard variable home-loan rates of Westpac, National Australia Bank, ANZ Bank and Commonwealth Bank. The banks’ moves triggered criticism from Treasurer Wayne Swan, who has introduced measures to boost competition from smaller lenders, including scrapping exit fees on consumers who change their mortgage provider.

Governor Stevens today kept the benchmark rate unchanged, citing “quite modest” credit growth.

“I hope that rates don’t move for the foreseeable future,” Smith said in an interview with Bloomberg Television. The recent acceleration in Australian inflation figures is a “blip” triggered by natural disasters and the nation’s rising currency is “doing the work of the central bank,” he said.

Declining Home Prices

Home prices declined in the first quarter by the most since 2008, according to an index measuring the weighted average for established houses in eight major cities, which dropped 1.7 percent from three months earlier, a report showed yesterday.

“I think we’re in a period where things are consolidating a little bit and that’s no bad thing,” Smith said in the interview. “I don’t think we’re in a bubble.”

“We’re seeing wages of course continue to increase and prices of properties decrease a little bit, so that ratio is improving a little bit,” he said.

To offset slower growth in Australia, CEO Smith’s strategy includes expanding the bank’s business in China, Vietnam, Malaysia, the Philippines, Taiwan, Singapore and Hong Kong to boost earnings from the Asia-Pacific region to about 30 percent by 2017.

Profit after tax in Australia accounted for 72 percent of total earnings in the first half, with Asia Pacific, Europe and America generating 14 percent. New Zealand added 14 percent. The Australian dollar’s 6.7 percent rise versus its U.S. counterpart in the six months to March 31 damped profit growth by around 2 percent, ANZ Bank said today.

The bank proposed an interim dividend for the fiscal first half of 64 cents a share, up 12 cents, or 23 percent, from the same period a year earlier.

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