Following National Australia Bank Ltd's (ASX: NAB) profit announcement yesterday; this morning it was Australia and New Zealand Banking Group's (ASX: ANZ) turn to surprise the market.
In the 12 months ended 30 September 2015 (FY15), ANZ achieved a cash profit of $7.2 billion, up just 1% on the prior period.
Earnings per share were flat at 260.3 cents. The bank said the flat EPS figure was attributable to the issuance of new shares as part of its capital raisings throughout the year.
The bank declared a final dividend of 95 cents per share, taking the full-year payout to 181 cents per share – up 2% on FY14. The annual dividend is equivalent to $5.1 billion being returned to shareholders or a payout ratio of 71%.
"We have produced another record result in FY15," outgoing CEO, Mike Smith, said. "In a constrained environment, we have continued to see growth in our core customer franchises in Australia, in New Zealand and in key Asian markets, partly offset by the effect of macro-economic headwinds on the International and Institutional Banking Division."
He added, "there are significant opportunities for ANZ, however lower economic growth, intense competition, the growing cost of regulation and market volatility present headwinds for all banks." On a cash profit basis – which is, for some, the preferred measure of profit – ANZ's FY15 second half cash profit fell 4% over the first half.
Moreover, full year return on equity (ROE) fell from 15.4% last year, to just 14% in FY15. Equity capital raisings put downward pressure on ROE margins. However, return on assets (ROA) also fell heavily, from 0.95% to 0.85%. ANZ's net interest margin (NIM), which is essentially the difference between what they make on loans versus what they pay on funding (e.g. customer deposits), fell to 2.04% from 2.13%. Operating expenses to operating income rose from 44.7% to 45.6%.
ANZ's Australian business generated a profit before provisions up 7%. The International and Institutional Banking business reported a 2% fall in cash profit.
"The New Zealand Division also grew profit based on market share gains and strong cost disciplines," Mr Smith said. New Zealand profit before provisions rose 7%.
Unfortunately, while ANZ was quick to tout profit figures before provisions, the bank's 'credit impairment charge' rose to $1.205 billion. The bank said "while the total provision charge increased to $1.2 billion or 22 bps, loss rates remain well under the long term average having risen from their historically low levels."
ANZ's Common Equity Tier 1 (CET1) ratio rose to 9.6% at September 30, up 0.87% year over year, thanks to the issuance of $4.4 billion of capital throughout the year. In addition, on completion of the Esanda Dealer Finance sale, ANZ expects a 0.2% uplift in its CET1 ratio.
Was it a 'good' result?
ANZ's result was in-line with expectations, however, it was concerning to see a material uptick in provisions and falling profitability. Mr Smith believes we are currently "bumping along the bottom" in credit markets, according to his discussion on Blue Notes. However, I find this hard to believe because ANZ's net loans and advances rose in all markets by at least 9%.
Interestingly, loans that were not impaired but 90 days past due were up 20% year over year to $2.38 billion. The bank said this was a result of: "a change in the management and reporting of the 90 days past due mortgages book in line with regulatory requirements, along with some deterioration in Western Australia and Queensland."
Buy, Hold or Sell?
ANZ is my favourite big bank, but I do not believe its shares are a good investment at this time. Indeed, if your goal is to better the market's return, over time, then my advice is for savvy investors to avoid ANZ shares at today's prices.
