Bad loans come good as ANZ posts the weak result that most anticipated

It was messy and hard to decipher, but once distilled, there are a few important things about the ANZ result.

The first one is that it was weak – although no weaker than most expected. This was not a quality profit, it was a result boosted by very favourable conditions in regards to bad loans.

The positive aspect to ANZ’s profit is that shareholders didn’t feel the pain as dividends were retained and the share buyback remains on track.

Had the provisions for credit losses not fallen to "the lowest level in a generation", ANZ’s earnings would have looked significantly nastier. They delivered the bank a $511 million cash kicker for the 2018 financial year. Without them, the cash profit would have been down 8 per cent.

Shayne Elliott ANZ CEO says ANZ is in a stronger position to meet the challenges facing the industry.

Shayne Elliott ANZ CEO says ANZ is in a stronger position to meet the challenges facing the industry.Credit:Andrew Meares

The provisions for bad debts at just 0.12 per cent of gross loans and acceptances was down from 0.21 per cent last year – which itself was already low. A portion of this can be explained by the sale of ANZ’s retail business in Asia, together with the run-down of its mid-market commercial business in the same region.

The flip side

While the positive credit environment is a positive, the flip side is that at this level, ANZ will be unable to rely on another sizeable fall in provisions to boost profits in future. The bank admitted this benign environment won’t last indefinitely.

Indeed if the residential property market continues to fall or takes a more sizeable hit, as some economists are expecting, provisions for troubled loans will be expected to increase.

Even with the boost that ANZ received from the benign credit conditions, the bank still reported a full-year cash profit from continuing operations, which was down by 5 per cent. And this muddy result was further hosed down as investors will find that cash profit for the year from continuing and discontinued operations ( mostly the wealth assets it is selling) fell by a far more hefty 16 per cent.

This came as no surprise given the bank had already warned the market that profits would be negatively affected by the revenue impact of compensating customers – mainly in the wealth division – for poor advice and fees that had been charged for no service and costs were hiked by the costs of improvements of its systems and processes designed to ensure the failures were not repeated.

While there are likely to be additional compensation payments and remediation costs booked in future periods, investors would be hoping that the lion’s share of these will have been booked in this result.

ANZ's finance chief Michelle Jablko said there would be more payments to come, but the bank had dealt with larger and more complex products first.

Investors will be looking towards ANZ's underlying profit trend after carving out favourable loans provisioning and the costs associated with previous poor behaviour.

On that basis, the story is not particularly favourable for ANZ – nor for its competitors.

'Strong headwinds'

Chief executive Shayne Elliott said retail banking faced "strong headwinds with housing growth slowing and borrowing capacity reducing".

Battening down the hatches on risk is the ANZ boss’s answer to weathering the challenging conditions. In 2018, ANZ swung markedly away from interest-only loans towards owner-occupied interest and principal mortgage lending. Elliott admits that the pendulum swung too far and the bank is now looking to get the balance right.

Over the full year, interest-only loans to owner occupiers and investors both fell more than 11 per cent, while owner-occupier principal and interest loans rose more than 22 per cent and investor principal and interest loans jumped more than 10 per cent.

The bank has also shown that it is prepared to forgo growth to improve its risk profile and that it is prepared to cut costs. There was increased evidence of cost cutting particularly with staff numbers skewed to the second half of the financial year.

There are limits to what any of the banks can do to boost revenue, other than by gaining market share. Elliott admitted that fees would more likely continue to come down – given there is little if any scope to increase them.

What ANZ needs to do now is follow its own internal role model – the New Zealand business.

ANZ's Kiwi arm appears to have done a fine job of cutting costs and growing its business – and it doesn’t seem to have been tainted by behavioural issues.

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