ANZ still grappling with ‘nuanced’ lending environment

ANZ has released its full-year results for the 2019 financial year (FY19), announcing a statutory net profit after tax (NPAT) of $5.9 billion, down 7 per cent from $6.4 billion in FY18.

The earnings decline was mostly driven by a $411-million slide in revenue generated by its Australian retail and commercial business.

Weakness in ANZ’s retail and commercial business was particularly reflected in its home lending performance, with mortgage settlements down $17 billion (30 per cent), from $57 billion in FY18 to $40 billion in FY19.

The bank’s overall mortgage portfolio contracted by approximately $7 billion (2.5 per cent), falling from $272 billion to $265 billion.

The division’s net interest margin slipped by 20 bps, from 2.68 per cent to 2.59 per cent.

ANZ CEO Shayne Elliott acknowledged that the retail and commercial division had a “difficult year”, pointing to “remediation charges, competition and record-low interest rates”.

Mr Elliott has also previously attributed the contraction in the bank’s mortgage book to a “conscious” decision to revise its home lending strategy.

Speaking at Aussie Home Loans’ 2019 Imagine conference in Sydney earlier this year, Mr Elliott lamented the current state of affairs in the home lending space.

Mr Elliott said that scrutiny placed on lenders off the back of the banking royal commission has produced a risk-averse culture that errs on the side of caution, in fear of repercussion for supposed breaches of responsible lending guidance.  

Speaking to Mortgage Business following the release of ANZ’s FY19 results, the CEO reiterated his concerns.  

“We want to be lending. That’s what we do for a living. That’s our role. We take deposits and lend it to people,” he said.

“We want to be out there doing that, but there’s been a lot of debate with regulators in the broader community about how we do so responsibly and there’s been, I think, a grey area in terms of interpretation of the law as it stands today.”

He added: “Until it’s crystal clear, it does make life a bit harder for us.”

Mr Elliott said he’s hopeful that the Australian Securities and Investments Commission’s (ASIC) work to revise its responsible lending guidance (RG 209) would provide the industry with greater assurance. 

In the meantime, Mr Elliott said the bank would pursue targeted home lending growth, particularly via the owner-occupier segment.

“We’re in the market; we just think that brutal, simple, market share growth is not the right strategy,” he said.

“We’ve got to be much more targeted about what kind of customers [we] want, where [we] want them, and how much [we’re] prepared to lend, so it’s a lot more nuanced than it used to be in terms of how you succeed in the mortgage world. 

“We want to grow share – we want to grow share with owner-occupiers in particular. That’s what we’re good at. And we’ve adjusted some of our credit policies, we’ve tidied up some of our processes to get that business back to where we would like it to be.”  

Despite reporting an overall contraction in home lending growth in FY19, ANZ’s chief financial officer, Michelle Jablko, told investors that the bank has observed a pick-up in volumes over the second half, which she attributed to processing improvements and ANZ’s work to rebuild the trust of its distribution networks.    

“In the second half of the year, we’ve significantly improved our home loan assessment times with better clarity and consistency on policy and risk settings for the frontline,” she said.

“This has seen the overall rate of decline in the portfolio progressively slow over the course of the second half. 

“We also ran a major marketing campaign to attract more customers and restore confidence across our distribution channels.”

Ms Jablko continued: “As a result, application volumes increased, with average levels in the second half more than 30 per cent higher than the first.”

The CFO added that ANZ’s “improved momentum” has continued over the first quarter of FY20, but said it may take some time before home lending growth is reflected in the bank’s balance sheet.

“This improved momentum takes time to flow through to the balance sheet and needs to be balanced against higher amortisation, with 82 per cent of customers paying principal and interest and many customers now getting ahead of their repayments given lower interest rates,” she said.

Mortgage portfolio break down

According to Ms Jablko, “almost all” of the contraction in ANZ’s mortgage portfolio was in interest-only loan volumes.

The bank’s results revealed that the share of interest-only loans as a proportion of the total mortgage book dropped from 22 per cent in FY18 to 15 per cent in FY19.

The share of interest-only home loan settlements also declined, falling from 13 per cent in FY18 to 11 per cent.

The results also reflect ANZ’s continued preference for owner-occupied borrowers, with the share of owner-occupied loans rising as a proportion of both ANZ’s portfolio (67 per cent) and its settlements (73 per cent).

Accordingly, the share of investor loans declined, slipping from 32 per cent to 30 per cent as a proportion of ANZ’s total mortgage book, and from 29 per cent to 26 per cent as a proportion of settlements.

Most of ANZ’s loans continued to be originated via the broker channel, with share in proportion to the bank’s total mortgage book remaining stable at 52 per cent.

However, the share of broker-originated loans as a proportion of ANZ’s settlements slipped, from 55 per cent in FY18 to 53 per cent.

ANZ’s overall share of the mortgage market fell to 14.3 per cent.

 [Related: Major bank flags $559m in new remediation costs]