ANZ to Revise Key Profitability Target Amid Capital Increase

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Australia & New Zealand Banking Group Ltd. will need to revise a key profitability target as a result of moves by regulators to require Australian banks to hold more capital.

The bank’s previous 2016 goal of reaching a 16 percent return on equity, a measure of a firm’s profits in relation to shareholder equity, is now “meaningless,” the lender’s Chief Executive Officer Mike Smith said in an interview. He didn’t say when the bank would reveal its new ROE target.

ANZ said on Thursday it is raising A$3 billion ($2.2 billion) in capital following moves by regulators to make Australian banks safer, taking equity issuances by the country’s largest lenders to the highest since the global financial crisis.

“You have to look at the ROE forecast in terms of the equity we held at that time, because quite clearly we didn’t anticipate holding huge amounts more equity,” Smith said. “If you look at the target of 16 percent ROE, if you back out the additional capital we’ve been required to hold since that time, we’ve probably met that benchmark.”

ANZ joins competitors National Australia Bank Ltd. and Westpac Banking Corp. in raising a collective A$11 billion of new capital so far this year, with Commonwealth Bank of Australia yet to reveal any plans.

The latest share sale addresses ANZ’s immediate capital requirements and reduces the need for further disposals, Smith said.

“That creates certainty and it takes the pressure off some of the asset sales, because quite clearly it’s very hard to put timing for completion on them. It basically would buy us some stability, and that’s why I did it,” Smith said. The lender has already lined up asset sales worth A$5 billion, he added.

Acted Quickly

Smith said he decided to act quickly on the capital increase to remove uncertainty that had been depressing ANZ’s share price. Otherwise the market would have started to speculate that ANZ would announce a capital raising through a dividend reinvestment plan, where shareholders swap all or part of their dividends for new shares, with the announcement of full-year results in October and with the next half-year results in March, he said.

ANZ in May offered a 1.5 percent discount to shareholders willing to buy shares through a dividend reinvestment plan, which was expected to yield A$480 million. That month Westpac also offered a similar discount to raise about A$2 billion.

“Our share price was getting knocked around basically because there was a lack of certainty in the market,” Smith said. “Therefore I felt it would be a far better idea to go now, go early whilst market conditions are good.”

ANZ shares have dropped 12.4 percent since late March, more than double the decline of the benchmark S&P/ASX200 index. The shares have been halted and are expected to resume Friday.

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