ANZ is reporting outstanding profits but below the surface its resilience is getting progressively weaker. The major banks have been reducing provisioning as bad debt experience has reduced. This downtrend in provisioning for bad and doubtful debts cannot continue much further and reduces the sector’s ability to withstand economic shocks and downturns.
ANZ delivered a surprisingly strong fiscal 2013 result, driven by consistent performance across all business units and improved cost containment. The reduction in provisions for bad and doubtful debts to historic lows is a concern though, and reduces resilience in the event of an economic downturn.
Banks continue to benefit from mostly conservative underwriting and sector exposure during and post the GFC, though there are occasional rumours of declining standards to chase market share in business banking. Provisioning has fallen across the board, reflecting growth in property prices in major lending markets, a benign economic outlook, and a need to bolster profit and dividend growth in the absence of meaningful net-interest income growth.
Figure 6. Bank provisions to total loans
Source: Clime Asset Management
There are few instances where provisions have been lower than today. In 2007 and 2008 provisions were lower and this preceded a very challenging time for bank-equity holders as the Global Financial Crisis (GFC) unfolded and dilutive capital raisings were required to boost provisions.
Pinpointing a significant rise in bad debts is very difficult. We carefully watch the levels of - and expectations for - unemployment and economic activity as key indicators. But the post GFC tendency of consumers and corporates to deleverage and the recent series of interest-rate cuts are likely to keep downward pressure on bad-debt expenses in the near term, supporting bank profitability.
ANZ reported statutory net profit after tax (NPAT) of $6.3 billion and cash profit after tax of $6.5 billion, both up 11 per cent. Performance was broad-based with double digit profit growth in all businesses silencing critics of its super-regional strategy. The cost-to-income ratio fell an impressive 130 basis points to 44.8 per cent, in line with the benchmark cost ratio achieved by CBA of 44.91 per cent.
The dividend exceeded expectations, with the board declaring a fully franked final dividend of 91 cents per share, amounting to a fiscal 2013 fully franked dividend of 164 cents per share - up 13 per cent on fiscal 2012.
ANZ’s provisions for bad and doubtful debts were down five per cent to $1,197 billion. Bad debt expenses, as percentage of loans, fell three basis points to 0.25 per cent and provisions as a percentage of total assets fell nine basis points to 0.62 per cent.
Figure: ANZ Price vs. Value Chart
Amelia Bott is an Equities Analyst at StocksInValue, a joint venture between Clime Investment Management, a value fund manager, and Eureka Report. StocksInValue provides valuations and quality ratings of 400 ASX-listed companies and equities research, insights and macro strategy. For an obligation free, FREE trial please visit www.stocksinvalue.com.au or call 1300 136 225.