ANZ Rallies as Low-Yield Business Cuts Offset Profit Drop

  • Shares up as much as 4.9 percent, sharpest rise since March 2
  • Lender cuts dividend for first time since 2009 to lift capital

Australia & New Zealand Banking Group Ltd. shares surged the most in three years as new Chief Executive Officer Shayne Elliott’s plans to shrink the lender’s Asian business further and write down the value of some of its assets offset the lowest half-year profit in six years.

ANZ shares reversed early declines to close 5.6 percent higher at A$25.05, the biggest gain since April 2013. That trimmed the stock’s year-to-date loss to 10 percent, compared with a 1.1 increase for the benchmark S&P/ASX 200 Index.

“Shayne Elliott is taking some pretty tough decisions, which his predecessor Mike Smith wouldn’t have,” said Simon Burge, chief investment officer at Above the Index Asset Management Pty in Sydney, which manages A$450 million ($347 million) including ANZ shares. “Given the tough environment banks are in, the cut in dividend, reducing the Asian loan book, while depressing profits now, are all prudent. It may ensure that disappointing news doesn’t jump at investors over the next few years.”

Hard Decisions

Elliott, CEO since January, has trimmed the lender’s risk appetite and embarked on a plan to boost returns and capital by shrinking the low-yielding Asian loan book, reducing staff and selling assets. He aims to cut the capital allocated to the institutional and international business to 40 percent of the total from half now in three to five years and redeploy it into the higher-return retail and commercial businesses in Australia and New Zealand.

These steps come as cash profit, which excludes one-time items, dropped 24 percent to A$2.78 billion in the six months ended March 31, the sharpest fall since 2008, impacted by some writedowns, the Melbourne-based lender said Tuesday. That missed the A$3.58 billion mean estimate of five analysts surveyed by Bloomberg.

Cash profit was hurt by items including an accounting change to the lender’s software capitalization method and a writedown of some of the bank’s investment in Malaysia’s AMMB Holdings Bhd. The accounting change reduced cash profit by A$441 million while the Malaysian impairment amounted to A$260 million, it said. Excluding the specified items, pro-forma cash profit would have been A$3.5 billion, the lender said.

Simpler Business

ANZ, cut its institutional banking staff by 4,056 in the 12 months to March 31 and reduced loans by A$14 billion, the lender said. Those steps resulted in the first “meaningful increase” in net interest margins for the institutional bank in six years, Elliott said.

“The actions being taken to simplify the business, rebalance our portfolio,
divest non-core assets and increase capital efficiency in the institutional loan book assisted the group to generate 76 basis points of capital during the half,” Elliott said.

That reduced profits at the international and institutional unit, which includes the Asian operations, by 41 percent to A$632 million, ANZ said.

ANZ also cut its dividend to 80 Australian cents a share from 86 Australian cents a share a year earlier to beef up capital and announced it will move its dividend payout ratio to its historical range of 60 percent to 65 percent of annual cash profit. ANZ’s common equity Tier 1 capital ratio, a measure of its ability to absorb future losses, stood at 9.8 percent as of March 31, compared with 9.4 percent three months earlier.

Bad-debt charges rose to a six-year high of A$918 million from A$510 million a year earlier, hurt by lower commodity prices that have led to the collapse of some companies.

“ANZ is making the right decisions, addressing many of the market’s concerns,” UBS Group AG analysts led by Jonathan Mott said in an investor note. “However, as has been seen numerous times in bank restructuring since the crisis, these processes are never easy and invariably lead to additional earnings volatility.”

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