Smith earns brownie points with investors

ANZ Bank boss Mike Smith might be tilting at windmills in his ambition to crack the Asian market but shareholders forgave all when he put the group's dividend yield on steroids, served up a set of double-digit earnings and slashed costs.

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.