ANZ's Aussie dollar boost

It was once assumed as a given that Mike Smith would instantly transform ANZ into a “super regional” with an eye-poppingly expensive mega purchase.

Now six years into the job, Smith instead has set the bank on a course to source up to a third of earnings from the Asian region by 2017 by gradually extending its tentacles throughout the region.

This morning’s third quarter update provided further justification for Smith’s steady as she goes push into the region, avoiding the kind of integration problems and cost blow outs that usually accompany ego boosting mega-mergers.

Perhaps the most obvious benefit of the regional expansion that came through this morning in the third quarter update was the benefits associated with a depreciating Australian dollar.

A drop of just 5c in the currency equates to a 1.5% lift in half year net profits. That marks ANZ out among the big four banks as a major beneficiary of the US Federal Reserve’s plan to begin winding back its massive monetary stimulus program.

Given the currency already has fallen up to 15% in the past few months, analysts no doubt will begin scrambling to update their full-year earnings projections for ANZ, which already is a favourite for many if only purely because it represents the best value in the sector (see Why ANZ and NAB are most loved).

On almost every measure, ANZ’s update provided pleasant surprises.  The cash profit was up 11%, revenue rose 5%, costs dropped 0.5% and provisioning was lower and its domestic wealth business was up.

The only glaring area of concern was in its margins. Net interest margins were compressed by 2 basis points and that trend is likely to be even more pronounced in the full year as a result of competition in its Asian operations.

According to Smith, the China fears have been overblown with growth of 7% plus continuing to drive the business. Many would argue that he would say that, given the bank’s exposure to the region, but recent statistics out of the world’s second biggest economy support his argument.

With all the talk in recent months about the slowing Australian economy, the trend towards a recovery in lending has been overlooked.

According to official statistics, new lending commitments in both retail and business lending have turned positive for the first time since 2008. Mortgage credit grew 6.7% on an annualised basis in the June quarter. And that is before the impact of new lending has started to bite.