Anyone reading the earnings update from Australia and New Zealand Banking Group (ASX: ANZ) on Tuesday morning would be forgiven for thinking their shares were going to get hammered.
The bank reported what most would consider to be a shocking set of interim numbers. Cash earnings fell a remarkable 24% to $2.78 billion, impacted by a $717 million charge it said would put the bank in a stronger position in the future, while it also cut its interim dividend by 7% to 80 cents, fully franked.
On Monday, Westpac Banking Corp (ASX: WBC) had delivered a mediocre report and had its shares crushed 3.5% for the day, so a similar outcome – or worse – could have been expected for ANZ shares yesterday.
But not so. Instead of falling, the bank's shares actually rose 5.6%, making it the best performing share from the ASX 200 group.
Here are four reasons why that may have been the case…
- Clarity. Investors have been fretting for some time that the banks may be on the verge of cutting dividends, so perhaps ANZ's announcement on Tuesday cleared the air and reduced that level of ongoing uncertainty.
- Better than expected. It's also possible that investors were expecting an even more severe hit to their dividends. ANZ said its final dividend would be "at least the same as the Interim Dividend in cents per share", indicating a full-year dividend of at least $1.60 per share. By contrast, Morgan Stanley recently said it expected ANZ to cut its dividend by 17% for the year to just $1.50 per share.
- Expenses. The bank said that significant progress was made in streamlining and simplifying the business to ensure it is "future ready". The margins enjoyed by the banks on the loans they write are becoming increasingly thin, so a reduction in costs could go a long way.
- Fresh perspective. Unlike his counterparts at its rival banks, ANZ's new CEO, Shayne Elliott, is taking a more realistic approach to the immediate outlook for the banking sector. He said: "The Interim Dividend of 80 cents per share fully franked is down 7% reflecting a move to gradually consolidate ANZ's dividend payout ratio within its historic range of 60-65% of annual cash profit which provides a conservative, sustainable and fully franked dividend base for the future."
Elliot, together with the board, made a tough decision that would impact the market's view on the business in the short-term, but it should help to strengthen the group's long-term stance.
Although the bank's share price skyrocketed on Tuesday that doesn't signify that the bank is out of trouble just yet. The banks have enjoyed record profits in recent years, but that trend could be reaching a tipping point, meaning investors may be better off considering other alternatives.
