ANZ: Q1 2016 trading update

As we noted in NAB: Q1 2016 trading update, low interest rates and continued, albeit moderate, economic growth in both Australia and New Zealand are helping the big banks record lower impaired assets and provisions. ANZ is no exception and its gross impaired assets in Australia and New Zealand continue to fall in the three months to December despite 'pockets of weakness associated with low commodity prices'.

If that was the end of the story then we'd be happy with this result. Earnings rose faster than expenses, with the latter contained due to redundancies offsetting additional expenditure on technology and increases in wages. After accounting for $362m in provisions, cash earnings rose 5%.

Unfortunately for ANZ, that's not the end of the story due to its much-maligned Asian expansion. This has been one of the reasons we've traditionally preferred the more Australasian-focused banks, CBA and Westpac. However, as we noted in ANZ: Result 2015, there are in fact good reasons for ANZ to have a material presence throughout Asia, particularly as it's the leading institutional bank in Australasia.

Nevertheless, this means ANZ is being affected more than the other majors by slowing Asian economic growth and recent global market volatility. These headwinds have increased since the start of this calendar year, with management noting the biggest impact on credit quality has 'tend[ed] to be concentrated around manufacturing … industrial companies and those exposed to trade'.

So despite falling in the first quarter of 2016, ANZ expects gross impaired assets at 31 Mar 16 to be similar to the $2.7bn recorded at 30 Sep 15. Moreover, the $362m in provisions in the first quarter – which increased 4% over the quarterly average for the six months to 30 Sep 15 – are expected to rise to around $440m in the second quarter.

Management also confirmed that funding costs have 'risen in a fairly material way' recently. This isn't just impacting ANZ of course and, as we saw in October 2015 when the big banks raised rates on home loans in response to higher capital requirements, they have the option of passing through at least some of these increased costs to their customers.

If so, this would help ANZ keep revenues rising faster than expenses. However, with the bank being affected more than the other majors by events abroad and with a dividend payout ratio already at the top of its intended range of 65–70%, the dividend is on shaky ground. HOLD.