ANZ continues to defy gravity, for now

ANZ Banking Group’s first-quarter performance signals that the Australian majors are continuing to defy the gravity of low demand for credit and pressure on net interest margins.

A 13 per cent lift in earnings relative to the previous corresponding quarter, albeit only about 3 per cent ahead of the preceding quarter, is a very strong performance in a very subdued credit environment.

As was the case through last financial year, the continuing improvement in credit quality from already-low levels of bad and doubtful debts has been a major contributor. A year ago ANZ’s charge for bad and doubtful debts was $311 million. In the first quarter of this financial year it was only $191 million, a $120 million improvement that accounts for a large part of the profit increase.

The other major influence on bank profitability last year was cost control. ANZ didn’t provide the detail of its cost performance other than saying that, while expenses were above guidance, it was largely due to changes in foreign exchange rates and, after adjusting for them, expenses were in line with guidance.

The bank said that, assuming no change in foreign exchange rates, annual revenue growth this financial year would be between 4 per cent and 5 per cent; expense growth would be about 2 per cent and the bank’s risk profile would remain stable. ANZ expects the full-year charge for bad and doubtful debts to be about 10 per cent lower than last year’s.

It will be interesting to compare the bank’s performance with its peers’ as they become available. ANZ has been the most aggressive of the majors in chasing market share and volume in mortgage and business lending, as well as customer deposits.

While there have been some fingers pointed at ANZ suggesting it has lowered its lending standards (it was unfortunate timing that it pulled its support from the troubled engineering group, Forge, today), there is no evidence of any meaningful deterioration in credit quality in its more recent results – indeed, quite the contrary.

The extent of the improvement in the majors’ credit quality – and the fact that this has continued even though reaching levels that are very low by historical standards – probably relates to the defensive stance of businesses large and small and their unwillingness to borrow to take risks. Strong growth in lending generally brings with it growth in future bad debts.

One suspects, however, that all the banks will be scrutinising their loan books for anything related to the automotive industry after the General Motors’ and Toyota’s decisions to cease manufacturing in Australia.

That will generate a lot of pressure on manufacturers of original equipment and the entire auto industry supply chain, and have a broader impact on the Victorian and South Australian economies which could flow through to the banks.

ANZ does have a different profile to its peers as a result of its super-regional strategy and expansion into Asia, so its performance doesn’t necessarily provide a precise guide to the experiences of the other majors. It also has a very large exposure to New Zealand.

Chief executive Mike Smith said today that the group’s international and institutional banking division had performed particularly strongly, with a number of country operations producing double-digit revenue growth. First-quarter global markets revenue was up 5.7 per cent to just over $600 million. The New Zealand division had experienced strong growth in its home loan book.

There were no references in today’s trading update to the turmoil that has been sweeping through developing economies as markets and investors have reacted to the US Federal Reserve Board’s decision to begin the tapering of its massive quantitative easing program.

It was, however, interesting that Smith singled out Singapore, China and Hong Kong as operations that had generated double-digit revenue growth.

Despite some of China’s recent issues as the authorities try to bring its shadow banking system under control and engineer a switch from exports and investment to consumption within the economy, those are probably the strongest and most stable economies in the region.

In some respects the Australian majors would be hoping for a solid, but not too impressive, set of results this year.

With the Abbott Government’s financial system inquiry to be completed by the end of the year, excessive profitability will only inflame their critics and encourage calls for measures to reduce their profitability and tilt the competitive playing field towards smaller institutions. This could be a good year to stuff a few hollow logs.