St George Bank has followed the update from ANZ on Friday with news that it is still on track to get the previously forecast 10 per cent earnings per share growth over the next two years.
The bank released a statement late yesterday providing the update which confirms guidance given at the annual meeting late last year. It followed the ANZ update on Friday which confirmed its revenue and earnings growth around the high single digits.
In its update, St George, our fifth biggest bank, said its earnings momentum continues to be driven by high single digit percentage revenue growth in an environment where credit quality remains strong.
It also said deposit volumes continue to be managed with a focus on profitable growth.
The bank said growth in residential receivables is on target for 10 to 12 per cent for the year ended September.
St George said in the statement that the growth in its managed funds for the five months ended February was 27 per cent annualised, reflecting strong net inflows and favourable market conditions.
“St George remains on track to meet its EPS growth targets of 10 per cent in 2007 and 2008,” the St George statement concluded.
St George shares tumbled 32c to $32.58 in yesterday’s sell off. The update came out well after the market close and contained information to be given to foreign investors in an about to start roadshow.
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So far the earnings update from the ANZ on Friday hasn’t spooked investors: it has tracked lower with the overall market, shedding 32c on Friday and another 29c yesterday to end at $28.58.
That’s down on the all time high reached of $30.24 reached recently.
In Friday’s trading update to the market, ANZ said that in the four months to the end of January, revenue growth was towards the upper end of its target range of seven to 10 per cent.
And most of the other comments in the two page update and then teleconference was in line with guidance at the 2006 results briefings and then the annual meeting.
“ANZ confirmed that trading for the first four months and expectations for the 2007 financial year are in line with guidance given at its 2006 results briefing.
“In the four months to the end of January 2007, revenue growth was particularly strong, towards the upper end of ANZ’s expanded target range of 7%-10%. Expense growth was in line with original expectations towards the upper end of the 5%-7% target range. This investment will continue to underpin future revenue growth.
“Personal has continued its strong run. Institutional and New Zealand are performing respectably given weaker New Zealand markets earnings.
“The Asia network business has good momentum, with revenue growth tracking at more than twice the Group average.
“Underlying margin decline has been broadly similar to the second half of 2006 however the headline margin decline will be impacted by one-offs such as the non-recurrence of the New Zealand Dollar hedging revenue in 2006.
“Credit quality remains strong. Provisions have however risen from the unsustainably low levels that were experienced in 2006 following unusually high recoveries. ANZ continues to expect higher losses in 2007 which will result from changes in the mix of its credit card portfolio, fewer recoveries compared to 2006 and more normal levels of corporate losses, although overall they are not yet at the level forecast for the year as a whole. The collective provision charge will also increase, with a lower “oil shock” provision release, and with 2006 benefiting from a reduction in the level of risk.
“Headline earnings will benefit from significant items following the sale of FleetPartners. As previously reported, earnings will need to absorb a lower $NZ hedge rate, the final run-off of structured finance transactions and a higher tax rate, which together will reduce cash earnings per share by up to 2% for the year.”
So it looks as though revenue and costs are at the high end of estimates: 9 to 10 per cent for revenues and around 7 per cent for costs. That’s why CEO, John McFarlane was quite strident on how the costs would be kept under control and that there would be no attempt to try and juggle a result that was better than expected for his last year in the top job.
He said that applied to costs especially, and the bank would be trying to control cost growth to drive revenues and therefore earnings.
Bad debts will rise (which will please some of the ‘henny pennys’ in the market who see bad debt crisis looms in personal credit every month when the RBA releases its financial aggregates) simply because the ANZ has been pursuing new business.
But the most important point is that the ANZ’s capital position is low at the moment because of the expansion into Asia and there were strong indications in the teleconference on Friday that the present limit on the dividend reinvestment program could be eased or removed.
Other analysts saw some danger on the bank lagging its competitors in terms of earnings per share growth because of the 2 per cent drop in cash earnings already forecast due to a slightly higher tax rate and the ending of the structured finance deal in its NZ banking business. Another complication is that the ANZ does have the biggest exposure to the NZ economy and the NZ dollar.
Another rate rise is expected in NZ this year and the mortgage market is where all the banking action is happening.
Offsetting all this is the continued strength of personal lending which, from the bank’s statement and commentary afterwards, continues to be the main growth driver. Business banking is doing better as well.
If the ANZ can drive both faster in the next eight months of the year then it will be a victory for McFarlane who has long believed the only way to grow in banking is to get closer to customer and increase the level of service and num
