ANZ scrubs up for its bypass
ANZ claims to be leading the way among its peers in reshaping itself for what it believes will be volatile years ahead. This prudent self-surgery has only one winner in the short-term: depositors.
While the overall result looked and was solid, with earnings up 10 per cent on the same half last year and 8 per cent above those generated in the September half (5 per cent on an underlying earnings basis) that was due to the strong performance of the bank’s institutional business and the continuing progress of its super regional strategy.
The underlying earnings of its core Australian banking business were down 7 per cent on the September half and up only 1 per cent on the same half last year, when impairment charges were materially higher. The retail banking component of that business experienced a 10 per cent fall in underlying earnings between the September and March halves.
What cruelled the Australian division’s performance was anaemic credit growth – despite growing its mortgage and business banking loans books at rates above the system’s there was growth of only 4 per cent in net loans and advances between end-September and end-March – and a net interest margin squeeze.
Wayne Swan might be urging the banks to pass on the full 50 basis point reduction in the Reserve Bank’s cash rate yesterday but the ANZ numbers (and the Bank of Queensland’s instant decision to pass on only 35 basis points) signal that isn’t going to happen.
ANZ’s Australian business shed 13.4 basis points of net interest margin between the September and March halves and 15.3 basis points March half on March half. ANZ’s net interest margin in the post-crisis period peaked in the March half last year and has been trending down at a gradually accelerating rate since.
The major factors driving that margin compression have been funding costs, which accounted for 3.9 basis points of the 13.4 basis points lost between the September and March halves, and the competition for deposits, which sliced 6.7 basis points from the net interest margin.
With no meaningful credit and volume growth, and the continuing efforts by the major banks to reduce their exposure to wholesale funding, their ability to reprice deposits to recapture margin is limited. As the chief executive of ANZ’s Australian operations, Phil Chronican, said recently the new reality within the system is that only depositors will be better off – bank shareholders, borrowers and staffs are the losers.
The majors are trying to adjust to what could be a prolonged, even permanent, structural shift in demand after a quarter of a century of remarkable (and unsustainable) growth in demand for credit – by cutting costs and shedding staff to bring their capacity more into line with demand.
As Mike Smith said today, the bank’s controversy-igniting decisions on interest rates, where it has distanced its decisions from the RBA’s, and its job-shedding reflect the necessity of reshaping the business to reflect the new environment.
‘’In the near term we are managing what could be described as a ‘work out’ phase in the global economy,’’ he said. The situation was most acute in Europe and this would cause volatility in global markets for many years, he said.
The banks aren’t alone in having to conduct significant surgery on their businesses – the same process is occurring across the non-resource side of the economy as companies adjust to the very subdued environment, anxious consumers and the competitive impacts of the strong dollar.
Overall, the ANZ result was characterised by strong discipline on costs, which rose only 3 per cent between the September and March halves against a 4 per cent increase in group income, and the performances of its institutional division and Asia Pacific, Europe and America division. The institutional division lifted its earnings 24 per cent to $1.1 billion and the APEA division 21 per cent to $432 million.
ANZ chief executive Mike Smith has been pursuing a controlled growth strategy within Asia and revenues from the APEA division continue to grow at double-digit rates and twice the rate of expense growth, with lending more than fully funded by customer deposits – lending grew 12 per cent and deposits 17 per cent in the March half.
About 20 per cent of group revenues are now generated within the APEA division, within sight of the group’s ambition of having the division contribute 25 per cent to 30 per cent of group revenues by 2017.
Smith’s well-known bearishness about the outlook for the global economy and the potential for fresh shocks is reflected in the group’s balance sheet settings. ANZ is carrying a tier one capital adequacy ratio of 11.3 per cent and has liquid assets of $99 billion – greater than its total offshore wholesale debts of $85 billion – and is steadily reducing the gap between its loans and deposits to reduce its exposure to wholesale funding, which it says is already the smallest of its peers.
The cost of that conservatism is some sacrifice of net interest margin in the domestic business and only modest domestic balance sheet growth but the levels of uncertainty in global markets and economies dictates the major banks adopt ultra-defensive postures until conditions stabilise.