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The ‘ANZ’ slap

Paul Rickard
Thursday, May 02, 2019

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One of the more disappointing aspects of ANZ’s half-year profit result was the decision by the Board to ignore the needs of thousands of self-funded retirees and pay its 80c interim dividend on 1 July.

By doing so, these investors are likely to lose the cash refund of the franking credits that go with the dividend. If the ANZ  had elected to pay the dividend just three days earlier on 28 June, they would have been eligible for a cash refund.

The first day of July is when Bill Shorten’s retiree tax is due to start. Dividends received from this date won’t be eligible for franking credit refunds. And while Bill has to be elected first, and then get his legislation through a hostile Senate, there has never been an argument about the start date.

No doubt some on the ANZ Board were mindful of not upsetting Bill Shorten and his team. But the ALP in Government is never going to be a “friend” of the ANZ or any of the major banks, and the Directors of ANZ only had one duty – to look after the interests of its shareholders. Furthermore, the precedent had already been set by Westpac, which accelerated the payment of its interim dividend from July to June.

Shame on Chairman David Gonski and his fellow directors.

The other disappointing part of the result was the performance of the ANZ bank in home lending. The total book went backwards by $2bn as net new loans written crunched from $31bn to just $21bn. Market share plummeted from 15.8% to 15.1%. And to make matters worse, the share of loans written by the more expensive broker channel went up to 57%.

CEO Shayne Elliott, in “bank speak”, admitted that the home loan performance was a shocker, saying: “we do accept we could have done a better job implementing our new risk settings and are taking steps to improve processes.”

Cash profit from Australian banking fell from $2.07bn to $1.81bn, a fall of 12.1%. Offsetting this was an increase of 33% in the cash profit in the institutional bank to $1.01bn. While volatile markets trading income contributed to the stellar result from the institutional bank, contributions from the more traditional banking areas of trade finance, payments and specialised lending also rose. The other major division, New Zealand, was flat.

Overall, ANZ posted a moderate increase in cash profit (on a continuing basis) of 2.0% to $3.56bn. This was better than the market was expecting of around of $3.4bn.

Apart from the small increase in cash profit, the highlight was ANZ’s progress in reducing expenses. In absolute terms, the Bank reduced costs by $300m as staff numbers fell from 39,700 in March 2018 to 37,400 in March 2019. In an environment where there in next to no revenue growth, and in some areas declining revenue, cutting expenses without impacting customer service is the key to maintaining profitability.

Of the majors, ANZ is leading in this race to digitise processes, improve productivity and reduce costs. That’s why ANZ has been the best performing bank in 2019.

From a balance sheet and capital point of view, the ANZ ticked a number of boxes. Earnings per share rose by 5% on the back of the completion of a $3bn buyback and a 3.7% reduction in the number of shares on issue; return on equity improved by 0.13% to 12.0%; ANZ will “neutralise” the upcoming dividend by buying back on market shares issued through the dividend re-investment plan; and the tier 1 capital ratio rose to 11.5%, 1% higher than APRA’s “unquestionably strong” target of 10.5%. Post some already announced divestments (OnePath, PNG retail etc), the ratio rises to 12.1% on a proforma basis.

Interestingly, the ANZ doesn’t seem too concerned about the Reserve Bank of New Zealand’s proposed increases to risk weighted assets and minimum capital ratios. The most exposed of the major banks to this proposal, it noted that “any changes are expected to be implemented over a 5 year period” and “ANZ is in a better position to manage any change given its transformation and has a number of practical options available if circumstances require”.

The market liked the result and ANZ shares rose by 2.8% to close yesterday at $27.95. A tick from me too, although it has to do better with its retail bank and lift its game in home lending. And Directors, please always put the shareholders first.

Published: Thursday, May 02, 2019

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