Yes it does pay to soften up the market with the bad news well ahead of trying to release the (relatively) good news.
But there was a cost and shareholders have paid the price for incompetent lending in the bank’s institutional division.
And the bank’s management conceded yesterday that the ANZ’s reputation could be damaged by some of the lending to the likes of failed margin broker, Opes Prime.
The ANZ broke the news at the start of April that it would be taking a big bad debt hit of at least $975 million (it turned out to be $980 million).
The shares fell from close to $24 to a low last Friday of just above $20. Helping drive the share price lower was news of the embarrassing Opes Prime collapse and the way the bank has become entangled in that failure.
The shares tipped over $21 on Monday and then retreated 36c on Tuesday to $21.14. They jumped to a high yesterday of $22.90 before backing off to close up 89c at $22.03.
Net after tax profit fell 7% to $1.963 billion and 14% on a cash basis to $1.674 billion.
Interim dividend is being maintained at 62c a share, which will require the payout of $1.19 billion to shareholders, or more than 72% of cash earnings. That’s up from a payout ratio of just over 59% in the interim period of 2007 and 70% for the second half ended last September.
The board of the ANZ knows that to cut its dividend would have been tantamount to throwing in the towel and asking shareholders to take all the damage for the top level incompetence. The board would not have escaped unscathed.
If all the cash is paid out in the interim to shareholders, it would leave around $550 million or so in retained cash, which would put the ANZ’s capital ratios under pressure.
So the DRP is being underwritten, which means the Bank will get the cash, one way or another and the underwriters will raise that by selling ANZ shares in the market after the dividend has been paid.
“We have also chosen to underwrite our Dividend Reinvestment Plan (DRP). The decision to underwrite our final dividend last year ensured we went into this period with a strong capital position and it makes sense to again underwrite our DRP.
"Together with our high collective provision balance, and increased liquidity position, we have significantly enhanced our balance sheet, which ensures we are operating from a position of strength,” CEO Mike Smith said in a statement accompanying the profit details.
He knows that while the bank needs the cash, many ANZ shareholders want cash because they are either retirees or superannuation funds which have to be paid cash dividends to enable the money to be re-invested elsewhere or to payout retirement benefits.
The fall in net after tax profit of 7% to $1.963 billion was after the impact of the $980 million in provisions for actual and future bad debts.
Besides the sharp rise in provisions (up $740 million from the first half of 2007) the bank also saw gross non-performing loans nearly double to $1.048 billion.
The ANZ said cash earnings per share fell 10% to $1.024 and the cost to income ratio gained 0.1 percentage point to 44.4% as revenues grew 11% on a cash basis.
ANZ said the provision charges came from a US monoline insurer, a large property company exposure (Centro, plus the exposure to Lafayette Mining) and for an economic cycle adjustment.
"The global environment is challenging, and in areas like retail sales, we are seeing early signs of a downturn in our domestic markets. However, with the steps we have taken to strengthen our balance sheet, we are particularly well placed to weather global volatility," ANZ chief executive Mike Smith said.
"We have provided for all known exposures, although in the current environment, it is more likely that higher levels of new problem loans will emerge than has been experienced in recent years," he said.
Net profit in institutional banking fell 47% due to a sharp increase in credit costs and a higher provision charge. That’s where the damage was concentrated and the dud loans, and from where any second half problems will emerge.
Personal banking grew 11% in both profit and revenue, while expenses grew 13% as the bank expanded its branch network.
The ANZ’s power point presentations made a big play about the new approach in Asia aimed at making the bank into a so-called Super Regional operator: which seems to mean a bank concentrating on Asia but with a global reach as well.
To ram home the point, the bank said the Asia Pacific division’s result was a standout with net profit jumping 58% after currency adjustments. Expenses in the region increased 34%.
Part of that push is to make new acquisitions, and Mr. Smith confirmed reports that ANZ is still considering buying Hong Kong’s Wing Lung Bank.
In contrast the return from the ANZ’s New Zealand business was sedate: profit up 6% and a warning that there were early signs the economy was slowing.
On the business banking side, Mr. Smith said there had been an increase in receivables as suppliers extended their length of payments.
"When you look at what is happening, the gradual slowdown in the economy, rates increasing, you would expect that. I’m not too worried by it so far but we’re watching it carefully," he said.
“While ANZ has been less affected than most of our global peers, we have seen a sharp increase in credit costs.
"We have been warning for some time that they must increase from unsustainably low levels.
"However some issues are specific to ANZ, and we are looking closely at our portfolio to ensure our exposures are carefully managed," Mr. Smith said.
