This morning Australia & New Zealand Banking Group (ASX: ANZ) updated the market that it expects an increase in bad debts and will see profit adjusted for one off items mainly related to accounting timing differences slide 3% to $5.2 billion for the nine-month period ending June 30 2016.

The group’s net interest margin remained steady as increased funding costs were offset by loan portfolio rebalancing, with retail banking experiencing modest loan growth offset by “asset pressure in a competitive market for mortgages and deposits”.

The bank’s new CEO, Shayne Elliot, hardly inspired either with a warning that today’s world is one of “subdued growth” which is “not a short-term thing”. The top man’s solution for the bank is to cut costs, go digital, and scale back its Super Regional strategy of expansion into Asia.

In fairness the shift from the banking model of physical expansion into Asia via bank branches and other old-school merchant banking activities beloved of ex-CEO Mike Smith to a digital future of innovations such as Apple Pay, Android Pay and the appointment of former Google Australia Head, Maile Carnegie, as Head of Digital is the correct strategy.

The new leader’s flexing of his digital credentials even climaxing with the bank’s decision to pick a fight on Twitter over allegedly sexist remarks made by a stockbroker about ANZ’s appointment of a new CFO.

There’s a lot to unwind for the new boss and there’s the additional headache of a still toughening regulatory cycle that may force the bank to raise more capital yet. On August 8 ANZ confirmed that regulatory changes enforced by APRA mean the average credit risk weighting of the group’s regulatory mortgage book will increase and the knock on effect is the requirement to carry more capital as a proportion of risk weighted assets.

As ANZ acknowledged, APRA’s repeated recalibration of how banks should calculate risk weighted assets has led to them having to increase the absolute amount of capital held despite the reported capital ratios remaining largely unchanged. ANZ expects the latest requirements to be effective by Q1 FY17 – the end of calendar year 2016.

Foolish takeaway

Bank shares globally and in Australia have all been falling over the past year and it’s no coincidence with ANZ shares down more than 12% over the period largely due to the toughening regulatory cycle that has resulted in dividend cuts alongside a tick up in bad debts associated with the commodity bust and softening Asian growth. Fortunately, the strength in Australia’s domestic housing market and underlying economy has cushioned the fallout from the more macro global issues.

For investors the bank’s yield remains attractive and the new CEO appears to have the right strategy, so the key to generating the best returns will be buying the stock after the regulatory headwinds have lightened.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.