Investors Markdown ANZ

Thumbs down for the ANZ’s interim profit result yesterday from investors worried about what the figures didn’t say. Early on the shares were down close to 3%, but the selling eased during the day and they closed off 2.1% at $32.25.

Investors took a dim view on the other banks as well with Westpac off 0.9%, and CBA and NAB down 0.9% and 0.2% respectively. Macquarie, though, fell 1.7% ahead of its full year figures release on Friday. ANZ’s cash profit for the six months to March 31 was up 23% to $3.4 billion from the write-down ladened $2.8 billion a year earlier, but it missed the $3.5 billion to $3.8 billion forecast by analysts.

ANZ is the first of the five major banks to deliver their financial results or updates over the next week. There’s Macquarie on Friday morning, interim figures from the National Australia Bank on Thursday and Westpac next Monday. The Commonwealth is due to release its third quarter trading update next Tuesday as well.

The ANZ cash profit of $3.4 billion was an improvement on the interim last year, when CEO Shayne Elliott used his first earnings result as CEO to start cleaning up what had been left behind by long time CEO, Mike Smith.

There were write-downs to the business and its dividend was cut to 80 cents a share from 86 cents (the first cut in payout since the GFC).

But the result was the lowest interim cash profit for three years and indicates the bank still has a lot of work in front of it.

Mr Elliott has embarked on a big restructure of the bank, reversing from the strategy of aggressive Asian expansion led by Mike Smith, to focus on more profitable business in Australia and New Zealand. That has helped generate more capital for the higher buffers regulars are asking for (more will be needed in the next 18 months) and reduced the riskiness of the bank’s balance sheet.

Bad debts from loans to large corporations was a key drag on ANZ’s profits this time last year as the slowdown in the mining sector hitthe services side of the industry hard, triggering a number of collapses, write-downs and big losses. That knocked on to the ANZ (and other banks such as Westpac and the NAB).

A year on the latest result showed a sharp improvement in credit quality thanks to the rebound in commodity prices, increased demand for some products, an end to the cuts in staff and assets, especially in the services side of the resources sector, and an improvement in the global economy.

As a result, ANZ’s total provisions for bad and doubtful debts was $720 million, down 22% from $918 million in the same half last year. Mr Elliott said yesterday he expected credit quality to be “broadly neutral” in the second half. Also helping the positive side of lower interest rates which with two cuts last year after the ANZ released its interim figures, helped take the pressure of many corporate balance sheets and some home owners (in mining areas) and triggered a rebound in house prices and loan demand.

As well as the Asian revamp and exploring a sell-off of its wealth arm, Mr Elliott has also started cost-cutting across the business, especially its institutional division. As a result the year to March saw the number of full-time equivalent staff employed by the bank drop by 2,850, to 46,046.

In a sign of further job cuts to come, the bank on Tuesday said was moving to make its workforce and management ranks more "agile," which is intended to "reduce waste and bureaucracy."

But a big worry for investors was the negative side of the lower rates regime of the RBA – the bank’s key net interest margin (NIM) continues to be squeezed.

The NIM fell to 2% from 2.06% in the half, despite an increase in some home loan interest rates during the period (and more since March 31, which will hopefully stabilise the situation in the second half).

"The environment for banking remains constrained with intense competition and pressure on margins, subdued lending growth, rapidly changing customer expectations and increasing regulation," Mr Elliott said. That applies to all the banks, even Macquarie where investors want to see tangible signs of an improvement forecast for at least the first half of 2017-18.

Early reactions from analysts help explain the weakness in the ANZ’s share price.

Citi analyst Craig Williams sain in a note yesterday:

"(We) Expect there will be some disappointment in the market with this result given the extent of the recent share price rally (peers face a similar fate). Whilst ANZ’s restructure remains on track in our view, the ride will be bumpier than many investors expect.

"As we flagged in January, revenue growth was likely to be harder to come by for ANZ in FY17. This was evident with 0% revenue growth compared to consensus estimate of ~3%. Whilst higher term deposit pricing and treasury drove net interest margin down 6bpts in this result, this is likely to reverse in 2H17 with mortgage re-pricing and lower deposit costs to feed through.”

And UBS analyst Jonathan Mott described it as “a messy result with a lot of lumpy items”.