ANZ's missing margin

The bank’s net interest margin is falling and may continue to decline if rates and the cost of funding rise.

ANZ Bank’s (ANZ) net interest margin contracted in the nine months to June 30 and the bank expects it to decline more in the next thee months. The Reserve Bank of Australia’s efforts to stimulate economic growth by slashing the cash rate to a record low is having its effect coupled with higher wholesale funding costs and an increase in deposit costs as ANZ Bank competes with its rivals for depositors.

Unlike Commonwealth Bank (CBA), which reported a record net profit in the 12 months to June 30 of $7.81 billion, ANZ may not have been able to re-price its lending portfolio to reflect increased wholesale and retail funding costs. The reduction of the spread between the cash rate, from which funding assets are priced from, and the bank bill swap rate, from which ANZ’s liabilities are priced from, further impacted the bank’s margins.

The good news is that non-performing loans are falling. In the nine months to June 30 ANZ’s provision charge was $876 million. But it’s hard to see that charge falling much further. If anything, it may rise.

Mike Smith, ANZ’s chief executive, said in a statement that Australia’s economic outlook has “softened”. China is slowing. Credit quality may be “sound and within expectations,” says ANZ, but the record low interest rate environment points to the Reserve Bank’s concern about the non mining sector’s prospects.

If economic activity does indeed pick up, helped by the low cash rate and a depreciating currency, the Reserve Bank will be forced to raise interest rates. That may further crimp ANZ’s net interest margins while it is forced to account for more bad loans.

ANZ shares fell 3% to $29.46 at 1038 AEST.