ANZ Bank Warns of Asia Volatility as Cash Profit Rises

  • Lender sees first-half credit charge higher than estimates
  • Asian slowdown, volatility sees credit conditions worsen

Australia & New Zealand Banking Group Ltd. said bad debt charges will be higher than analysts expect in the first half amid a slowdown in Asia and increased market volatility, even after profit rose in the first quarter.

The lender expects a first-half group credit charge a little above A$800 million ($568 million), compared to the current market consensus of A$735 million,  the Melbourne-based lender said in a statement Wednesday. Unaudited cash profit, which excludes one-time items, climbed to A$1.85 billion in the three months ended Dec. 31, compared with A$1.79 billion reported a year earlier.

The Asian region has been a “little bit more volatile” than expected, Chief Executive Officer Shayne Elliott said in an interview on the lender’s website. “It tends to hit in the manufacturing base across Asia-Pacific which today is in southeast Asia, most predominantly Indonesia. And that absolutely is having an impact in terms of our credit books. ”

This is the first earnings update for Elliott, who after taking over Jan. 1 is under pressure to turn around the lender’s Asian operations. The Asian business, part of former CEO Mike Smith’s plan to make a regional lender to compete with HSBC Holdings Plc. and Citigroup Inc., is dragging down return on equity and depressing the share price.

Shares Decline

ANZ shares dropped 0.8 percent to A$23.01 at 10:22 a.m. in Sydney, extending losses for the year to 17 percent. ANZ is the worst performer among the four-largest lenders and also lags the 8 percent slide in 2016 for the benchmark S&P/ASX 200 Index.

“While ANZ also exhibited almost stable margins and some level of underlying growth like its main competitors, the increase in bad debts largely due to the Asian exposure is a sticking point,” Angus Gluskie, a managing director who oversees $550 million including ANZ shares at White Funds Management in Sydney, said by phone. “It just goes to show the comparatively higher risk in ANZ’s books.”

The group net interest margin, a key measure of profitability, declined by 2 basis points due to the markets business, the lender said.

Total provisions for bad debts rose to A$362 million in the first quarter, from A$232 million a year earlier. Common equity tier 1 capital, a measure of the lender’s ability to absorb future losses, stood at 9.4 percent as at Dec. 31 compared with 9.6 percent three months earlier.

Employee numbers fell by 2.5 percent in the quarter, ANZ said without giving more details.

“With the environment presenting a number of challenges, the new management team has taken action to reduce costs, to tightly manage the credit environment and capital, and to simplify and re-position the business,” Elliott said in Wednesday’s statement.

ANZ’s quarterly update rounds off earnings disclosure by the country’s largest banks. Commonwealth Bank of Australia warned of risks posed by global economic turbulence Feb. 10 as it posted its slowest first-half profit growth since the financial crisis. National Australia Bank Ltd. reported a 8 percent rise in first-quarter earnings Tuesday. Westpac Banking Corp. doesn’t disclose quarterly earnings.

“The ructions in financial markets likely leave ANZ in need of a major strategic reset, with its Asian super regional strategy pressured,” CLSA Ltd.’s Sydney-based analyst Brian Johnson said before the update. He said compared to its peers, ANZ derives a greater proportion of its earnings from financial markets, which are in “structural decline.”

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