ANZ on track for record annual underlying profit, topping 2007 despite lending contracting

By Gareth Vaughan

ANZ New Zealand is on track for record annual underlying profit despite its lending contracting.

ANZ reported a 45% jump in underlying profit, which excludes non-cash and significant items, for the nine months to June 30 of NZ$916 million on Friday and a 19% rise in net profit after tax, or statutory profit of NZ$735 million. The statutory profit figure comes after a NZ$102 million charge stemming from the group's move to a single core banking system, nearly eight years after ANZ's A$4.9 billion acquisition of the National Bank from Britain's Lloyds TSB.

The bank's provision for credit impairment over the nine months tumbled NZ$276 million, or 68%, to NZ$132 million.

Asked whether ANZ's September year net profit after tax might exceed the NZ$1.039 billion the bank notched in the year to June 2007, the height of the recent cheap credit bubble, ANZ chief financial officer Nick Freeman told interest.co.nz that it would depend on what happens with the hedging of the bank's derivatives contract and where exchange rates and interest rates are, as these factors "can swing the number round quite a bit" from a net profit perspective.

However, CEO David Hisco said from an underlying profit perspective a record high was on the cards.

"Certainly if you extrapolate the underlying (profit), you'd well and truly hope that we'd crack it on the underlying," Hisco said.

ANZ's 2007 underlying profit was NZ$975 million, meaning it needs to make just NZ$60 million in the fourth quarter to exceed this. Rival ASB this month posted record annual net profit after tax of NZ$568 million.

'Bollard probably right on lower profits from an RoE perspective'

Asked about Reserve Bank Governor Alan Bollard's comments that bank shareholders ought to expect lower profits compared with what they got prior to the global financial crisis given higher regulatory costs and customer deleveraging, Hisco said from a return on equity perspective (RoE) Bollard was probably right.

"I think globally if you look at bank return on equity, return on equity for banks generally is looking to fall a little and that reflects the fact that there's greater capital requirements on banks. And so I think in terns of the absolute return on equity, the comments he's making are correct," Hisco said.

"Obviously if you're in a low growth environment you need to be vigilant around costs which is what we've been doing. So I think as a broad statement he's probably right if you look at return on equity."

Meanwhile, Freeman said: "I don't really want to buy into the whole return discussion. The reality is it's a competitive market out there and returns are a function of market competition."

ANZ NZ includes the ANZ and National banks, UDC Finance and fund manager OnePath.

June quarter profit up 10%

ANZ also released its General Disclosure Statement for the nine months to June. It shows a NZ$23 million, or 10%, rise in June quarter net profit after tax - versus the June quarter last year - to NZ$257 million from NZ$234 million. Although net interest income rose NZ$45 million to NZ$649 million, overall operating income fell NZ$27 million to NZ$823 million. Operating expenses rose NZ$5 million, or 1%, to NZ$394 million. The bank's credit impairments fell NZ$36 million to NZ$47 million.

Gross loans and advances fell NZ$756 million in the three months to June 30 to NZ$95.939 billion from NZ$96.695 billion at March 31. The drop came as housing loans fell NZ$54 million to NZ$53.978 and non-housing loans fell NZ$541 million to NZ$38.054 billion.

Hisco said net interest margins had "improved a little" without providing specifics. At the half-year they were up 23 basis points year-on-year at 2.44%. The margin improvement comes with ANZ having 60% of its home lending book on floating interest rates as of mid-July, up from 42% at September last year. Just a quarter of new lending is at fixed-term rates.

Banks tend to do better out of floating, or variable, mortgages because the margin between the variable rate and short end of the yield curve, such as three month bank bills, is higher than the margin between swap rates and fixed rate mortgages.

Hisco said ANZ's net interest margins had also been boosted by its rural portfolio but the bank was now "starting to get towards the end of the story" in terms of rising margins.

Asked about his outlook for credit growth over coming months Hisco said he was "cautiously a little optimistic."

"I think there's a bit of activity happening around the (Rugby) World Cup and we're coming into the summer months when people tend to do more," said Hisco.

"And I think coming out the other side of that in 2012 we'll see a lot more of the Canterbury (earthquake rebuilding) activity hopefully starting to flow. So there's a few things to suggest that there may be a slightly better environment to operate in over the next 12 months, but we're really setting our sails for things to be pretty much as they are or slightly better. If we get surprised on the upside that'll be a good thing."

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