Shares of Australia and New Zealand Banking Group (ASX: ANZ) have traded largely flat today despite the $84 billion bank announcing a healthy uptick in profit.
In the nine months to 30 June 2015, ANZ produced a cash profit of $5.4 billion, up 4% on the prior corresponding period, and a statutory profit of $5.58 billion, up 11%.
Cash profit is the preferred measure of profitability since it excludes non-core items to arrive at a result more indicative of the actual business' operating profit.
ANZ CEO, Mike Smith, said the Australian, New Zealand and Asia Pacific businesses "put in good performances", but noted "economies in our key markets have slowed".
ANZ, through its 'Super Regional Strategy' is seeking to generate between 25% and 30% of profit from key overseas markets by 2017 – a point of differentiation to its domestically focused peers.
"Our super regional strategy continues to provide us with differentiated sources of revenue and future growth options and it is underpinning our performance in every part of the business," Mr Smith said.
Risk
While each of Australia's major banks has posted respectable profits over the past few years, the market's attention recently turned to regulation. Indeed, over the past three months, each of the biggest banks has raised capital by selling shares to investors to bolster their regulatory capital positions.
ANZ recently announced it'd conduct a $3 billion capital raising.
If the majority of shareholders participate in the raising and enable the bank to meet its targeted capital level, ANZ said its pro-forma CET1 Ratio will rise to 9.3%. That'll be a good level for the bank in my opinion, although further capital raisings shouldn't be ruled out.
"The recent capital raising has allowed ANZ to deal with known regulatory change, such as the higher capital adequacy requirements for Australian Mortgages and positions ANZ's capital ratios within the top quartile of international peers," Mr Smith said.
Now what
Moving beyond capital requirements, one trend we're likely going to witness take place shortly is a slow rising of provision charges for bad debts.
Over each of the past four quarters, ANZ's provision charge for bad debts has risen. Although the levels are certainly sustainable, it's important to note that provision charges are deducted straight from profit, and could therefore hurt the bank's ability to post higher profits.
Should you buy?
Given the outlook for the banking sector locally and abroad, I'm not a buyer of ANZ shares today.
I think those choosing to buy today must be in it for a very long time because the medium-term downside risk is large and probable for each of the banks. However, if you want market-beating returns from your investments – like I do – I think you'd be best to avoid the big banks' shares altogether, for the foreseeable future.
A better dividend stock than the big banks
