There’s a new rule of thumb for every investor interested in or invested in banks, watch the result, not the upgrades.
The bank yesterday reported surprisingly higher than forecast growth in earnings which went a long way to supporting the very strong rise in its share price since early March.
The shares rose from around $28.40 in early March to hit an all time high of $31.50 in the past week after the Commonwealth’s bullish update a week ago.
The market reacted as it always does by selling off the ANZ on the actual result after the strong rise over the past few months.
The shares closed at $30.88 off 32c after the bank warned of a tougher second half withbad debts becoming more of a problem (and yet we have heard that before.)
“Conditions remain supportive of good growth,” chief executive John McFarlane said who hit the mail on the head with this brief summation: “All in all, this is a good result”.
And yes it was but it was nothing like the cautious sentiment contained in the three upgrades or forecasts released by the bank since October.
The ANZ has become a very conservative organisation, not given to gilding the lily in its financial reporting, unlike the aggressive way in which it has led the industry back to rediscovering its customer base, the joys of bank branches and the wonders of efficient service.
In fact it has become a master of understatement.
Just look at this trio of earnings updates, starting with comments from John MacFarlane last October on the release of the 2006 results. This is what he said about the outlook for 2007:
“As the benefits of our investment program come through, we are confident to extend our future revenue target range to 7-10%. We will continue to invest to underpin revenue growth, and work towards leadership in our major businesses over time. We believe this will build superior and sustainable value for shareholders over the medium to long term. In consequence, expense growth in 2007 is likely to be similar to that in 2006.”
And at the AGM in December, chairman John Goode appeared to go a little more into his shell: “We expect the environment for banking to be supportive in the year ahead. Conditions in Australia should still be conducive to reasonable earnings growth although it is unlikely to exceed 2006 levels. New Zealand’s economy may well be softer over the next two years, but we remain confident of the long term future of our New Zealand business”.
And in early March this update from the bank: “In a shareholder update today, 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.”
Now if you had taken those words to heart you’d be right in wondering if the bank was going to be battling for a while. Then the figures were going to be OK, high single digit growth for revenue, which turned out to be an undershooting by almost 50 per cent (in terms of growth rate). Underlying earnings were up by a double digit amount.
In fact you can judge how good it was by looking at the way the economy has been travelling: if general inflation is running just over three per cent and the economy is growing by three to four per cent, the ANZ has got a real growth in revenue of five to six per cent and around four to five per cent growth in underlying earnings.
That’s considerable momentum and a useful yardstick for the rest of the majors to report: Westpac, the NAB and St George.
Underlying cash net profit (the best measure of bank earnings) was $1.94 billion, up 11.8 per cent, while cash earnings per share grew by 10.9 per cent to 104.2 cents. Dividend was lifted to 62c, up 10.7 per cent from the interim payout of 2006.
Group operating revenue grew by 13 per cent to $5.61 billion; the cost to income ratio fell to 44.3 per cent from 45.8 per cent because the bank continued to drive revenues faster than costs in the half.
Bad debts and problem loans were not as bad as feared by analysts and the result was in line with market expectation of a profit around $1.9 billion which is expected to become a full year result around $4 billion.
Headline earnings came in at $2.10 billion for the half, up from $1.81 billion in the same period last year. But that figure was boosted by a one-off after tax gain of $141 million from the sale of its vehicle fleet leasing and management business FleetPartners.
ANZ reiterated its guidance for full year revenue growth between seven and 10 per cent and expenses cost growth between five and seven per cent. But it warned that provisioning for bad debts was likely to rise in the second half of fiscal 2007.
“While the credit environment is benign, we expect provisions to be significantly higher in the second half, with the first half unusually low due to recoveries,” Mr McFarlane said.
“Although provisions rose, they were significantly lower than we expected, due to large recoveries late in the half.
The New Zealand business recorded its best underlying result in recent years with profit up 8.1 per cent.
Mr McFarlane said the bank’s net interest margin decline was better than past experience, falling just five basis points to 2.24 per cent.
