Smith earns brownie points with investors
It was the right message to send to shareholders as the market had turned its back on growth stocks in favour of yield stocks. The bank's results are a good sign of what to expect when Westpac reports its results on Friday and National Australia Bank next week - lacklustre credit growth, offset by cuts to expenses and juicy fat dividends.
Australian banks have always paid decent dividend yields, hence their outperformance on the stockmarket in the past year, but ANZ's decision on Tuesday to move it up a notch by lifting the dividend payment by 11 per cent put a rocket under its share price.
By close of trade ANZ's shares were trading at close to a six-year high, up almost 6 per cent on the day, and putting it on a market capitalisation of more than $87 billion.
In the case of NAB, expectations are its Australian business will do well but the overall result will be affected by the albatross around its neck: the UK business. Yet it wouldn't surprise if Cameron Clyne, as NAB's latest version of the Ancient Mariner, tries to improve his position in the approval rating index by lifting dividends.
ANZ lifted dividends 11 per cent, putting it on track for a dividend payout of 69 per cent for the full year.
For the six months to March 31 its cash profit rose 10 per cent to $3.18 billion despite lacklustre credit income growth. Most of the rise came from its global markets business - foreign exchange and fixed-interest plays - and a cut to expenses.
The bank generated total operating income of $9 billion and its global market business contributed $1.1 billion of that, compared with $900 million in the previous six months.
But in terms of Smith's Asian strategy and his ambition to earn up to a quarter of its profits from the region within the next five years, it is hard to see how. Cash profit from the Asia Pacific, Europe and America (APEA) came in at $460 million, up 3 per cent from the previous corresponding period and down 11 per cent in the previous six months. So its New Zealand operations are a bigger contributor to overall earnings.
Asia's contribution to the APEA profit was $301 million, which represents less than 10 per cent of the bank's total earnings. Smith's Asian growth strategy, which he launched years ago, has been a drag on the bank's overall return on equity of 15 per cent, which makes it a depressing influence on the share price.
The big question for all the big four banks is what next for growth? ANZ's expansion into Asia appears to have a few flaws, NAB's foray into the UK has been a disaster, Westpac is hoping its resuscitation of the Bank of Melbourne brand works and Commonwealth Bank has its tentacles in wealth management.
Despite the seeming inability to get the ANZ Asian growth story to take shape and get the full imprimatur of investors, its ability to take the knife to costs scored a lot of points. ANZ spends about $1.5 billion on wages every six months. By sacking people it was able to boost profit significantly. A reduction in headcount produced 22 per cent of the increase in profit from the first half of 2012 to the first half of 2013.
Improving efficiency is admirable and rewarded by shareholders, but the greater prize is to grow the Asian business with a return on equity that will push the share price higher rather than anchor it to the success of the Australian business. This is the task of a visionary leader.
Frequently Asked Questions about this Article…
ANZ lifted its dividend payment by 11%, putting the bank on track for a full-year payout ratio of about 69%. That bigger dividend boosted ANZ's yield at a time the market prefers income stocks, driving the share price up nearly 6% to close near a six‑year high and pushing market capitalisation above $87 billion.
For the six months to March 31 ANZ reported a cash profit up 10% to $3.18 billion despite lacklustre credit income growth. The bank generated total operating income of $9 billion, with its global markets business contributing $1.1 billion (up from $900 million in the prior six months).
Cost cuts, including reductions in headcount, played a meaningful role: ANZ spends about $1.5 billion on wages every six months, and the reduction in staff accounted for roughly 22% of the profit increase from the first half of 2012 to the first half of 2013. Improved efficiency clearly helped lift returns and impressed shareholders.
ANZ's CEO Mike Smith has targeted earning up to a quarter of group profits from Asia within five years, but current results show the Asia contribution remains small. Cash profit from the Asia Pacific, Europe and America (APEA) was $460 million (up 3% year‑on‑year but down 11% versus the previous six months), and Asia itself contributed $301 million—less than 10% of total earnings—so the strategy has yet to materially move the dial.
The article notes ANZ's Asian expansion has been a drag on overall return on equity, which is around 15%, and that slow progress in Asia has weighed on the share price. While cost cuts and higher dividends have supported the stock, investors are still looking for Asian growth to deliver a higher ROE and stronger share-price upside.
The article suggests other big four banks (NAB, Westpac and Commonwealth Bank) could show a similar pattern: weak credit growth offset by expense cuts and attractive dividends. NAB faces headwinds from its UK business, Westpac is banking on a Bank of Melbourne revival, and Commonwealth Bank is focused on wealth management—so investors should watch for dividends and cost‑control commentary.
ANZ’s global markets operations—foreign exchange and fixed interest—were a major driver of the profit lift. That business contributed $1.1 billion to operating income in the half, up from $900 million in the previous six months, showing non‑lending activities can meaningfully boost bank profits.
Bank dividends remain attractive in Australia, but investors should balance yield with how sustainable profits are. For ANZ, higher dividends and cost cuts have supported returns, yet international expansion (Asia for ANZ, the UK for NAB) carries execution risk and has so far limited ROE improvement. Look at payout ratios (ANZ guiding ~69%), underlying profit drivers (like global markets and cost savings), and the long‑term viability of growth strategies before deciding.
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