Investors gave the ANZ Bank’s interim profit result for 2017-18 a small cheer yesterday.
The shares rose 2.4% to $27.47 after the small 4% rise in cash earnings from continuing operations and the unchanged interim dividend of 80 cents a share.
That rise was a relief rebound because there was no more bad news in the report than the ANZ had already primed the market to expect.
Investors skated over the slide in the net interest margin and that fact that all the rise in earnings and more came from the 43% drop in bad debts.
The impact of that can be seen from ANZ’s profit before the impact of lower bad debt charges which fell 1.7%, to $5.39 billion. But it was the $300 million plus fall in the bank’s total provision for bad debts – from $720 million last year to $408 million – that was the main profit driver, and also a positive in that it was a sign of very few customers defaulting on their loans.
Investors ignored that and a warning from CEO, Shayne Elliott that the ANZ (and presumably its rivals) it will face “difficult” business conditions for the foreseeable future.
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% to 1.93% over the year from 2%. This narrowing came despite banks raising some home loan rates during the period, especially fixed interest loans for some investors.
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.
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.
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 by analysts and big shareholders.
Don’t be surprised if there is a re-evaluation of the interim result’s quality in coming days.
The unchanged interim dividend is the true indicator – there is nothing in the outlook that would give the board confidence to lift the level of the payout, especially with more bad news certain to come from the banking royal commission.
On the royal commission, Mr Elliott said the reputation of the banking sector "has been damaged, badly" because because it had not listened, failed to properly balance the needs of stakeholders, had been too slow to fix problems and had not put customer interest first.
As a result of the commission he said "credit standards are tightening [and] credit growth in the regulated sector is slowing." He said that the way in which banks pay mortgage brokers are set to change in the wake of the inquiry.
ANZ has already said its external legal costs for the royal commission would be around $50 million for the 2018 financial year.
