The soft spots in ANZ's solid result

Within an otherwise solid ANZ Banking Group nine-month performance there were the same disconcerting signs of an evolving slowdown in momentum that were evident in Commonwealth Bank’s second-half experience when it reported earlier this week.

In May, when ANZ reported for the six months to end-March, ANZ’s earnings were running 11 per cent ahead of the previous year. Today it said earnings for the nine months were up only 8 per cent of the same period of last financial year.

That’s a slowdown in anyone’s language and is consistent with the flatlining income growth that CBA reported in the six months to June.

It is apparent that the softness in otherwise strong bank results relates to the domestic market, where brittle confidence and consequent subdued demand for credit -- and strong competition for the demand that is available -- is having an impact.

ANZ, of course, has a distinctive strategy given its "super-regional" aspirations and therefore a bigger growth exposure outside the domestic market than its peers.

In the first half it was generating substantial earnings increases from its Asian operations and its chief executive, Mike Smith, said today it was achieving strong results from the region. He described ANZ’s Australian and New Zealand performance as "consistent" but also said parts of the Australian economy had been "a little slower than expected".

Third-quarter revenue trends were "a little softer", the group’s net interest margin was "slightly lower" and, while trading conditions had shown some signs of improvement coming into the final quarter, asset pricing remained highly competitive.

As with CBA, there are some positives. Credit quality has strengthened; (CBA’s bad and doubtful debt charge picked up in the second half because of a couple of large corporate exposures); unit costs are still being reduced; and ANZ’s core equity tier one ratio continues to strengthen. Smith said it would be above 8.5 per cent by the end of the financial year.

ANZ has been growing its mortgage lending above system growth rates for more than four years and has made a big play in commercial lending in the past two years. However, in the domestic market, while funding costs have fallen a little, relatively weak demand and strong competition for the available volumes is keeping pressure on margins.

ANZ says it is on track to meet its earnings guidance for the full year but that revenue growth would be at the lower end of the range of 4-5 per cent. Cost control and bad debt provisions about 12 per cent lower than the previous year are expected to offset lacklustre revenue growth.

At the moment, it would seem the major banks are still generating their domestic earnings growth internally through cost reductions and a continuing rundown in their levels and incidence of bad and doubtful debts, already at historically low levels.

The pristine credit quality of the major banks actually points to the relatively weak state of the economy. They aren’t making enough new loans for their credit experience to return to their normal loss experience. That’s not a particularly positive statement on the state of the economy and suggests a continuing relatively subdued outlook for their domestic banking businesses.