The market punished the ANZ yesterday, despite reporting its highest ever profit.
The shares closed down $1.15, or 3.7% at $29.96, with a massive 23.25 million shares traded, worth $670 million. It was a real sell-off which only brushed its rivals. Both the NAB and the CBA had strong rises yesterday in comparison.
That cut the year's gain for the bank of 10% up till Wednesday night, to just over 6%, well down from the 14% rise in the bank index.
On the face of it, it was an odd reaction to some solid looking figures and the market might be accused of over reacting and not taking heed of previous qualified guidance on an expected rise in impaired loan provisions.
That increase will continue in the coming year to be faster than revenue growth, according to an outlook comment issued yesterday, so shareholders had better expect more volatility in the ANZ share price, if yesterday's market reaction is any guide.
New CEO, Mike Smith and others muttered the word 'disappointing' several times, according to analysts, which was odd given that the entire performance had been predicted earlier in the year.
The bank said its revenue increase was the highest for many years and headline earnings rose 13% after tax to $4.18 billion.
The ANZ's retail banking network reported revenue growth of 10%, which was a standout result, more than making up for lower returns from the bank's institutional business. It's earnings jumped 14% in the year.
Stripping out the gains from the sale of a subsidiary and hedging operations, the cash profit which is the industry's preferred measure for comparing earnings, rose 9.4% to $3.924 billion while cash earnings per share were up just over 8%.
Earnings per share for the year-ending September 30 were $2.24 a share. The bank has declared a fully-franked final dividend of 74 cents a share, making a total pay-out $1.36 for the year, up around 8.4%
But the market saw a problem in a sharp rise in second half bad debt provisions, something that was signalled back at the interim announcement and at the yearly result a year ago.
The rise in provisions resulted in the bank missing second half analysts' forecasts with 7% rise to $1.988 billion on a cash basis. Analysts had been looking for around $2.008 billion or a bit more.
The result was out before the market opened and the shares opened 2.7% down, fell a bit more and then struggled for the rest of the day.
The reason: a 39% rise in the ANZ's provisions for credit impaired loans, to $567 million.
That was a little odd: it's not as though it was new news.
Here's what the bank said at the time of the interim profit announcement In April:
"For the 2007 year, ANZ's revenue and expenses are expected to be in line with previous guidance of 7%-10% revenue growth and 5%-7% cost growth. 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".
There was a similar flagging of the expected rise from the low figures in 2006 at the time of the final profit announcement a year ago.
And this is what the bank said in yesterday's statement:
"While credit quality still remains sound, credit costs rose by 39%, in line with our earlier guidance to the market."
And there's more to come with this forecast made for the 2008 year from new CEO, Mike Smith.
"ANZ has invested in its business in recent years and we are well placed to continue strong revenue growth in the period ahead. We will continue to invest in developing our business but with a renewed discipline around managing the appropriate margin between revenue and expense growth to deliver superior performance for our shareholders.
"The credit environment should remain benign, although provision growth is expected to exceed lending growth, as 2008 will not benefit from the same level of recoveries as 2007", Mr Smith said.
So will we see the same reaction (there was a similar sell off in the wake of the April 26 interim comment) over the next year? Judging by yesterday's selling, the answer is a 'yes'.
It seems loan losses are bad news to investors in the present climate of subprime mortgage problems, credit derivatives going sour and big losses being taken by US banks. And it doesn't matter how much you 'guide' the market, there are always those who sell on the news (and probably buy on the next dip to lock in a trading profit).
But it was a solid outcome for the bank as it changed CEOs.
"Revenue growth was the highest in recent years at 9.7%* or above 10%* when adjusting for foreign exchange movements. Cost growth was 7.6%*, with the consolidation of ETrade Australia and Stadium Australia having a disproportionate impact on costs.
"While credit quality still remains sound, credit costs rose by 39%, in line with our earlier guidance to the market. ANZ Chief Executive Officer," Mike Smith said.
"Revenue growth of 10% was a feature of ANZ's performance in 2007, helping deliver good growth in profit before provisions. The Personal Division was the standout. New Zealand performed well.
"Strong results are flowing through from our network business and banking partnerships in Asia. We are addressing the mixed performance from the Institutional Division with initiatives to improve performance in 2008.
"We have committed approximately $1.5 billion to investments during 2007. Given this, we are taking the opportunity to enhance our strategic flexibility by offering a discount of 1.5% under our Dividend Reinvestment Plan (DRP) which is underwritten and expected to raise an additional $1 billion at a cost to 2008 EPS of approximately 0.4%,"according to Mr Smith
And t
