ANZ inches above the average

ANZ is carefully and successfully navigating the post-crisis market. Indeed, on most measures the bank is slightly above its peers among Australia's big four.

ANZ’s trading update shows that, like its peers, it is tracking along steadily and unspectacularly. Given the conditions, that’s a positive and probably even desirable outcome.

The update, for the first nine months of the group’s financial year, shows that ANZ’s underlying earnings are up 5.5 per cent to $4.5 billion, which is more or less in line with the 6 per cent growth it reported for the first six months.

That’s a little better than Commonwealth Bank’s growth rate for the year to June of about 4 per cent and meaningfully better than NAB’s third quarter performance where earnings flat-lined, although NAB is carrying the lead weight of its troubled UK banking businesses.

In any event, it is consistent with what we know of the conditions, where credit growth is subdued, where funding pressures and the competition for deposits remain a constraint on margins and therefore where the key driver of earnings growth will be how banks manage their costs. ANZ has extended a base salary freeze for its senior executives.

ANZ does have a meaningful point of difference to its peers – its super regional strategy and a growing presence in Asia should over time lead to some divergence in performance from the other major banks.

ANZ said today that its Asia Pacific, Europe and America division was continuing to grow, with positive second half revenue trends and its "jaws" (the difference between the growth rates in its income and costs) strongly positive.

The APEA businesses are meaningful within ANZ but not yet meaningful enough to drive the overall numbers, with Mike Smith finding it tougher than he might have expected to unearth sensible acquisition opportunities in Asia despite the distressed state of many of the UK and European banks with operations in the region.

All of ANZ’s key divisions, except wealth management, produced increases in income. Where most banks have experienced declines in their income from markets because of the difficult conditions ANZ said its global markets income is tracking 2 per cent ahead of last year at $1.4 billion, with its composition shifting as planned towards customer-related activity. Customers sales revenue, ANZ said, were up sharply.

ANZ didn’t disclose its margins but did say they were relatively stable and that the Australian division’s margins had recovered slightly in the third quarter. ANZ lost 15.3 basis points of net interest margin in that business in the first six months because of higher funding costs and the higher relative cost of deposits in particular.

As with its peers, ANZ is managing its lending growth in line with its ability to fund that growth with deposits rather than wholesale borrowings and, indeed, is growing its deposits (up 8.7 per cent) at a faster rate than its loans (up 7.7 per cent).

That growth in lending is above the level of credit growth in the domestic system and ANZ said it had increased its market shares in traditional banking, household deposits and lending and commercial.

The Commonwealth result earlier this week saw it generally holding or marginally losing share in the key banking segments and although NAB continues to improve its share of personal banking its overall numbers were quite flat. Westpac, too, has been more focused on the liabilities side of its balance sheet and attracting deposits than it has been on growing its asset base. For all the banks the priority is reducing their reliance on wholesale debt markets that are still vulnerable to shocks emanating from the yet-to-be-resolved fissures within the eurozone.

None of the majors is showing any signs of stress within their loan books and indeed all of them appear to be experiencing modest improvements in credit quality and a consequent decline in impairment charges against profit despite the tough conditions in the non-resource side of the economy. ANZ’s impaired assets declined slightly in the nine months.

The post-crisis conservatism of the major banks is in tune with the cautious and defensive mood of consumers and businesses, which is unlikely to shift within the near to medium term.

That means they are going to have to live with only modest income growth and focus on productivity gains for meaningful bottom-line growth while continuing to place more emphasis on their funding than their lending.

The credit boom era of super-charged profitability is behind them, which is a good thing for the system and the economy and one that should (but won’t necessarily) reduce the level of aggression within the usual rounds of bank-bashing triggered by their results announcements.

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