THE DISTILLERY: ANZ sympathy

ANZ Bank's results show that Mike Smith's Asian strategy is paying dividends, but Canberra's case for the banks to pass on the Reserve Bank's interest rate cut in full is fanciful. The business commentators are rallying to ANZ and piling on Treasurer Wayne Swan, with a few asking what state the bank would be in without Asia propping it up.

Firstly, The Age's Malcolm Maiden agrees with Smith's claims that his bank has led the way towards a more robust debate about the process of setting interest rates.

"The case for independent rate adjustments by the banks was laid out in ANZ's March-half profit release yesterday. ANZ boss Mike Smith delivered a $2.97 billion underlying group profit that was 5 per cent up on the September half and 6 per cent better than the March half last year. ANZ's growing overseas network and its institutional banking division delivered the gain, however. Earnings in the group's Australian division actually fell, by 7 per cent.”

Business Spectator's Stephen Bartholomeusz says Treasurer Wayne Swan can crow all he likes about the banks passing on RBA cuts in full, a simple look at ANZ's numbers shows this 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 Australian's Richard Gluyas says Smith's super-regional bank strategy is looking particularly well timed with the domestic economy in trouble.

"Sure enough, as underlying profit in the domestic business retreated 7 per cent due to funding-cost pressures and anaemic credit growth, there was a 21 per cent profit surge from Asia Pacific, Europe and America (APEA). Most of the growth came from the institutional division, where earnings were 71 per cent higher due to strong contributions from global markets and transaction banking. Even New Zealand did its bit, lifting profit by a respectable 11 per cent. The point is there is no better time to be geographically diversified – in the right region and with a strategy that is gaining market acceptance after a hard slog – than now.”

The Australian Financial Review's Matthew Stevens runs us through the methods that ANZ can use to pretty-up its "ugly sister” local arm.

"The banks have but three choices to cope with the new realities, according to Smith. They can choose to be less competitive in the race for deposits, they can chase cost recovery with out-of-cycle rate rises and they can cut their cost-cloth to better suit the times. ANZ will eschew the first option but work hard on the other two. That is why jobs numbers have been and will continue to be trimmed, and why ANZ will make more use of the flexibility that comes with its monthly pricing routine. In the end, Smith seems genuinely sanguine about the state of his local arm, just as he is increasingly bullish about the progress of his Asian mission. He was rather less sanguine, though, about the regulatory pressure on bank capital."

And The Australian's John Durie says the domestic economy and Swan's taunts aren't the only reason why Smith is cranky.

"Smith has plenty of reasons to bemoan increased regulations, which mean he now has to hold twice as much capital as he did five years ago. The financial crisis has also doomed the banking industry to what he sees as a decade of slow growth, which puts more emphasis on execution than ever before. ANZ failed on this score in the latest half, first in still lagging the market in wealth management but more importantly in having its foot on the accelerator in home loan growth at the wrong time. In Smith's words, 'we got a bit excited' in trying to offset the fact that in the previous six months the bank was lagging the Australian market."

While we're on rates, The Sydney Morning Herald's Ian Verrender waited to see what happened to the Australian dollar in the wake of the 50 basis point cut from the Reserve Bank. It's almost back to where it was before the announcement.

Meanwhile, The Age's Asian affairs reporter Peter Cai finds an analysis from leading economist Ross Garnaut anticipating volatile demand for resources from China, which runs counter to the optimistic outlook from Treasury. The Australian's Asia-Pacific editor Rowan Callick surveys the submissions to the white paper "Australia in the Asian century” and finds the rhetoric from Australian business about Asian engagement doesn't match the record.

The Australian Financial Review's Chanticleer columnist Tony Boyd says the coal industry is becoming increasingly nervous that it'll become one of Treasurer Swan's piatas to whack to bring the budget back to surplus. The Australian's Commodity Watch columnist Robin Bromby says positive signs at Hyundai are a downstream positive for commodity prices.

And finally, Fairfax's Insider columnist Ian McIlwraith says Dulux hasn't yet finalised its bidders statement for Alesco.