ANZ sees banking 'golden period' coming to an end
ANZ Banking Group warns it will face "difficult" business conditions for the foreseeable future, after a sharp fall in bad debts lifted its cash earnings by 4 per cent to $3.49 billion.
The bank on Tuesday reported softer interest income amid a squeeze on its profit margins, with much of the earnings growth due to lower charges for bad debts.
It will pay a dividend of 80¢ a share. Analysts had forecast ANZ would make a profit of about $3.6 billion.
"I think our sector has had a golden period for 20-plus years and we don’t think that’s going to continue, it is going to be harder," chief executive Shayne Elliott said in an interview with the bank's website, Bluenotes.
Mr Elliott said revenue growth would continue to be "constrained" in the second half, due to higher regulatory costs and intense competition.
"The difficult trading conditions we originally forecast in 2016 are expected to continue for the foreseeable future," Mr Elliott said.
ANZ's net interest margins - which compare the bank's funding costs with what it charges for loans - contracted from 2 per cent to 1.93 per cent over the year. This narrowing came despite banks raising some home loan rates during the period.
Its expenses fell in absolute terms, and the number of full-time staff employed at ANZ fell by 4466 to 41,580, which includes the impact of it selling businesses during the period.
ANZ's return on equity - a key gauge of profitability - rose by 32 basis points to 11.9 per cent.
Under Mr Elliott, ANZ has been shedding "non-core" businesses including its wealth operations and businesses in Asia, and Mr Elliott argued the strategy made sense for the softer revenue environment facing banks.
"We are now benefiting from a more focused organisation with sector-leading capital and improving returns. While we expect this trend to continue, we have needed to manage additional regulatory costs, softer industry revenue growth and the impact of the bank tax," Mr Elliott said.
I think our sector has had a golden period for 20-plus years and we don’t think that’s going to continue.
ANZ boss Shayne Elliott
The results showed that a key reason for the lift in its profits were much lower provisions for bad and doubtful debts, a benefit that goes straight to the bank's bottom line, but is seen as a "lower-quality" form of earnings in the financial markets.
Net interest income from continuing operations fell 1 per cent, and ANZ’s profit before the impact of lower bad debt charges fell 1.7 per cent, to $5.39 billion.
Offsetting this decline, the bank's total provision charge for bad debts fell from $720 million last year to $408 million, a sign of very few customers defaulting on their loans.
Bell Potter analyst TS Lim said although ANZ's revenue was weak, the bank was well capitalised, and it had flagged it would ultimately return this to shareholders.
"The margin was a bit soft as bad debts got them over the line," Mr Lim said. "I think it's going to be like a utility, with an 11 to 12 per cent return on equity. It's sitting on a lot of capital, and it's becoming a dividend stock."
Alongside the squeeze on profit margins, banks are facing higher regulatory and compliance costs, and ANZ said external legal costs from the banking royal commission would cost it about $50 million.
It would not predict the outcome of the Hayne commission but said it would engage with the inquiry in a constructive manner.
“The Royal Commission into Financial Services in Australia will also continue to have an impact on the sector. ANZ will learn from this inquiry and continue to take real action to restore trust within the community,” Mr Elliott said.
The dividend will be fully franked and paid to shareholders on July 2, 2018.