ANZ margin pressure ‘worrying’

A Morningstar analysis of ANZ Bank’s latest quarterly profit results has focused on falling margins and a “messy” trading update overall, despite the major lender’s strong performance.

ANZ enjoyed a strong first quarter, with the company’s quarterly update revealing profits are up while costs and expenses have declined.

The bank last week reported a cash profit of $2 billion for the quarter, up 31 per cent on the quarterly average of the second half of the 2016 financial year, supported by “good performance” in the bank’s retail and institutional arms.

“Our key customer businesses delivered good outcomes, retail and commercial in Australia and New Zealand again performed well,” said ANZ chief executive Shayne Elliott.

“Highlights include market share gains in new-to-bank customers driven by the success of ApplePay and AndroidPay, institutional banking delivered pleasing results in Australia and Asia. This has seen us manage the revenue impact of initiatives to improve capital efficiency and returns.”

ANZ said a number of transactions, including the sale of its Asian retail and wealth business, the UDC Finance business in New Zealand, and its 20 per cent stake in Shanghai Rural Commercial Bank, would boost the bank’s APRA common equity tier 1 position by around $2.7 billion.

However, Morningstar analyst David Ellis said the trading update “was again messy” with one-off property sales and lower bad debts driving the strong profit result.

“Unspecified lower net interest margins, or NIMS, disappointed following two stable half years where margins averaged 2.00 per cent,” Mr Ellis said.

“Margin pressure was expected following recent competitor updates, but ANZ Bank’s NIM declining ‘several basis points’ is worrying. Higher funding costs and lower returns on capital caused the decline.”

Morningstar has reduced its fiscal 2017 forecast NIM to 1.95 per cent from its previous forecast of 1.98 per cent with similar decreases in outer years.

Mr Ellis said that despite the impressive cash profit outperformance, the limited detail and a messy fiscal 2016 comparison make it difficult to draw too many conclusions form the update.

“Obviously new CEO Shayne Elliott is making good progress on restructuring and asset sales with three recently announced sales progressing to completion later in calendar 2017," added Mr Ellis.

ANZ estimates a 70-basis point release of common equity tier 1 capital on completion. The bank is currently sitting on a ratio of 9.5 per cent – the additional 0.70 per cent will take it to a peer-leading proforma 10.2 per cent based on APRA methodology.

[Related: ANZ names new wealth CIO]

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