ANZ eyes business lending as it struggles with mortgage growth
While investors were disappointed with ANZ’s cost performance, Mr Elliott said the result demonstrated the bank’s ability to manage the bank’s operating costs well, “which are stable again, despite the inflationary pressures”.
Milford Asset Management portfolio manager Will Curtayne said it would be difficult for all banks to achieve growth as interest rates rise and mortgage growth slumps from high single digits to low single digits. low figure.
“There is some growth for ANZ in the institutional sector, but the reality is that revenue growth for all banks will be challenged,” Mr Curtayne said.
He said comments from Mr Elliott and ANZ’s relatively new chief financial officer, Farhan Faruqui, struck a much more cautious tone, warning investors not to expect too big a rebound in margins due to rates. higher interest.
“The bull case for banks is hopefully some net interest margin expansion as rates rise and credit growth slows, but the CFO has essentially diluted the benefits of the NIM, saying that before we get a benefit, we’re going to see higher costs and more provisions on our mortgage portfolio,” Curtayne said.
Home loan processing
ANZ said it expects to earn an additional $800 million from the cash rate increase over the next 12 months, but Mr Faruqui said any windfall would depend on external factors including competition.
Although ANZ stressed that it had now added 30% more capacity to process home loans as quickly as its peers and meet demand, Mr Elliott said the bank would not chase market share in the highly competitive world of mortgage lending at the expense of shareholder returns.
“Once you have the capacity, the question is whether we should use it,” Elliott said.
Retail and commercial banking increased 11% from the same period of 2021 to $1.986 billion.
Mr Elliott admitted ANZ’s retail banking performance had been disappointing, but stressed the firm had retained a disciplined approach to risk which would be very helpful to the bank from a provisioning perspective.
“We were hoping to do more now, particularly in Australian retail and commercial, but we are catching up fast,” he said.
“I’m happy with our approach to risk, although it hurt short-term earnings growth.”
Mr Elliott said he would rather allocate capital to expand lending in the institutional sector than underwrite more mortgages in a highly competitive and shrinking market where margins are shrinking, signaling a willingness to abandon the plan of the bank to return to the same level of growth as the other major banks.
“Where are we going to grow up? I think the opportunities for growth are much greater outside of home loans because in a rising interest rate environment, home loans are likely to grow more slowly,” he said.
“We think there will be an expansion in business credit and we think we are well positioned to fund that.”
Strong credit dynamic
Excluding the impact of a disappointing trading performance from its capital markets division’s balance sheet, ANZ’s institutional business grew 9%. The overall figure fell 23% to $730 million.
“Our loan growth has been very strong in institutional banking and we expect that to continue,” Elliott said.
Mr Faruqui said there was strong lending momentum, directed towards more profitable clients in segments such as financial institutions, sustainability and food and agricultural supply chains. Selecting the right customers helped margins increase by 5 basis points during the six months, he said.
However, head of institutional Mark Whelan warned not to expect the same level of growth in the second half, given that much of the demand for credit came from customers pulling on facilities due to uncertainties. geopolitics linked to the invasion of Ukraine by Russia.
Elliott said predicting how much underlying demand was driving inflation versus how much was resulting from supply chain shocks would remain a big challenge.
“I think [predicting where inflation is coming from] is part of the complexity and that’s why people struggle a bit with it,” he said. “Instead of having this slight rise in inflation, we went from zero to 6% very quickly.”
The upshot is that many companies are still unable to pass those costs on to their customers, Elliott said, meaning banks should stay close to their customers and wait carefully to see how things go.
Although ANZ did not take into account the impact of rising inflation and the rising cost of living on customers’ ability to repay their loans, including mortgages, Mr Elliott said that the bank was confident that other buffers, including around income assessment, were strong enough to guard against a large increase in bad debts.
“We’re starting off in a surprisingly benign period,” he said. “Doubtful debts have never been so low. There are fewer people with a home loan who are in difficulty.
ANZ increased its interim dividend to 72¢, fully franked, from 70¢ in the prior comparable period, and it remained flat with the 2021 final dividend.
Citigroup analyst Brendan Sproules said the result beat consensus, but was entirely driven by rewriting provisions after the COVID-19 pandemic.
He said the underlying result was 4-5% weaker than expected, but the rate hike would provide a boost in the second half.
“The weak core earnings result is likely to worry investors today,” Sproules said. “However, the second half should improve as rising rates begin to push NIMs higher.
“A rising rate environment should also contribute to a recovery in market earnings, which saw a ten-year low in this result.”