Australia and New Zealand Banking Group reports: Should you buy?

Australia and New Zealand Banking Group (ASX:ANZ) has reported a cash profit in line with expectations but dividends and margins were compressed.

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Following a disappointing results announcement from Westpac Banking Corp (ASX: WBC) yesterday, Australia and New Zealand Banking Group (ASX: ANZ) gave shareholders something to smile about, reporting a strong half year cash profit earlier today.

However, aside from the 5% jump in half year cash profit, there are more than a few figures from today's report that'd have many investors concerned.

In all, for the six-month period to 31 March 2015, ANZ produced a mixed bag.

Here are 10 key takeaways from today's report.

  1. The bank produced a record cash profit of $3.676 billion, slightly ahead of the analysts' consensus of $3.64 billion
  2. Australian home lending grew above system (i.e. the market's average) for the fifth consecutive year
  3. A dividend of 86 cents per share, up from 83 cents per share, was declared. Analysts were expecting a payout of 88 cents.
  4. Earnings per share were 129.9 cents, up 5% from 124.3 cents in the prior corresponding period.
  5. The bank's cash net interest margin was 2.04%, meaningfully lower than the 2.15% it reported last year
  6. Return on equity was 14.7%, down from 15.5%
  7. Return on assets came in at 0.89%, down from 0.96%
  8. Its operating expense ratio jumped to 45.1%, up from 44.3%
  9. The group's Common Equity Tier 1 (CET1) capital ratio was 8.7%, up from 8.3% a year earlier
  10. The bank says the future will be characterised by a "lower growth environment"

Commentary

In addition to the headline figures, for long-term shareholders, the commentary found in bank reports is also very important.

Commenting on today's results ANZ CEO Mike Smith said, "This is a good, well balanced financial performance with solid progress made in reshaping our business in response to the more challenging macro-environment."

Mr Smith said the core Australian businesses performed strongly and the International and Institutional Banking (IIB) division held its own despite a tough operating environment.

"For the foreseeable future, we will be operating in a lower growth environment in which there will continue to be occasional volatility and shocks," he said. "Nevertheless, the outlook for credit quality remains relatively benign supported by low interest rates, the stimulus of a low oil price and an appreciating US Dollar."

ANZ is the only major Australian bank actively seeking to compete with local and regional banks throughout Asia, as part of its Super Regional Strategy. During the period, profit from Asia Pacific Europe and America (AMEA) was up 18% and accounted for 20.2% of the group total. Developments throughout the region, particularly from China, which is currently transitioning its focus from being infrastructure led to consumer-fcoused, are closely watched by ANZ. To this end Mr Smith said, "While China's economic growth is slowing, this process is being well managed."

He added: "This environment presents some challenges, however we are confident about the benefits of our Super Regional strategy over the longer term and the opportunity to continue to improve financial performance in the near term."

Should you buy ANZ shares?

Each of the major Australian banks are preparing investors for an intensely competitive environment characterised by subdued credit growth. ANZ may be able to deflect some of the local slowdown with its expansion into Asia, however, it's also important to recognise this comes with its own set of risks.

Considering the mining boom has ended and prices in many parts of the Australian housing market may have reached their zenith; I'm currently mindful to demand a healthy margin of safety on the purchase of bank shares. Meaning, given the gloomy economic outlook, investors should prepare for lower profit margins, potential rises in bad debts and low-to-no growth in dividend payouts by paying a price for bank shares which leaves plenty of room for profit setbacks.

Unfortunately I believe none of the banks are currently priced for this subdued growth outlook, with each having recently hit fresh all-time highs. Therefore I'm not a buyer of ANZ shares today.

Motley Fool contributor Owen Raskiewicz has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. Owen welcomes your feedback on Google plus (see below) or you can follow him on Twitter @ASXinvest. 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.

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