Six months ago ANZ Banking Group chief executive Mike Smith went to some lengths to extoll the virtues of his super-regional strategy to a doubting market. Today, releasing the bank’s first-half results, he really didn’t need to. The results spoke for themselves.
With its core Australian division producing only a modest 5 per cent lift in earnings – and earnings from within Australia actually falling 6 per cent -- the 11 per cent increase in the group’s cash earnings was driven by a 48 per cent increase in earnings from Asia Pacific, Europe and America and a 46 per cent increase in earnings from New Zealand. Relative to the March half of last year, those two geographies have added nearly $500 million to their contributions to the group.
ANZ’s super-regional strategy produced a 17 per cent increase in the Asian income within its international and institutional banking division while its scale, improving credit quality and an increased focus on less capital-intensive and higher returning business, saw its cost-to-income ratio improve 30 basis points. The division’s contribution to the result was $1.37 billion, compared to the Australia division’s $1.48 billion.
Smith described the international business as “firing on all cylinders” and said that since launching the super-regional strategy six years ago the compound annual growth rate in earnings from Asia had been 37 per cent.
The latest result also highlighted the performance of the New Zealand business within an improving economy, with ANZ growing its market share while improving productivity and credit quality and improving the New Zealand business’ return on equity by 550 basis points.
ANZ’s strategy had been criticised for diverting capital away from its home market where it could have been deployed more profitably. Today’s result tends to vindicate Smith’s pursuit of diversification and a differentiation of ANZ from its peers.
It isn’t as though the ANZ domestic business has been neglected. ANZ has been growing its mortgage book and business lending at above-system rates but in an environment where demand for credit remains relatively weak and there is continuing pressure on net interest margins – ANZ’s net interest margin was down five basis points in the half.
It is, as is the case with its peers, the continuing focus on costs (ANZ’s Australia division’s cost-to-income ratio has improved from 39.8 per cent two years ago to 37.3 per cent) and lower bad and doubtful debt charges that have sustained profitability.
The improvement in the bank’s productivity also showed up in profit per average full-time-equivalent employee, which rose from $62,429 a year ago to $73,266, and its positive “JAWS” – the rate of growth in income relative to the rate of growth in expenses – across every key business line.
The cycle of continually reducing charges for bad and doubtful debts may, however, be nearing its end – ANZ experienced a 4 per cent increase in impairment charges within the Australian business in the half, although overall the charge was down 12 per cent and the level of gross impaired assets has now fallen 32 per cent over the past two years to its lowest level since September 2008.
ANZ has been aggressively promoting lending to smaller businesses and growing its business loan book, so it will be interesting to see whether the experience of its peers differs. There have been some not-too-subtle comments about relaxing lending standards from ANZ’s main competitors.
Across the sector impairments are very low by historical standards and, given the restructuring occurring across the economy, it would appear inevitable that at some point in the not-too-distant future the shrinking of their bad debt experiences will end regardless of whether they loosen their lending criteria.
There wasn’t any significant expectation that the major banks would unveil any meaningful capital management with their interim results, given that the Australian Prudential Regulation Authority has said it will impose a one percentage point capital surcharge on the four majors because of their status as domestic systemically important banks.
The low-growth domestic environment, the impact of competition for loans and deposits on net interest margins and the amounts of capital the majors now hold in the post-financial crisis regulatory environment is moderating returns on capital. ANZ’s was steady at 15.5 per cent.
The group has, however, raised its interim dividend by 14 per cent to 83 cents a share, or $2.3 billion.
It said the increase reflected its stronger performance and a gradual rebalancing of the interim and final dividends towards a more even split while maintaining a payout ratio towards the upper end of a range of 65 per cent to 70 per cent of its cash earnings. The major banks are very conscious of their shareholders’ thirst for income and the way that has underpinned their hefty share prices.