Why Australia and New Zealand Banking Group shares are falling on $360 million of charges

This morning Australia and New Zealand Banking Group (ASX: ANZ) shares edged lower after the bank made a surprise announcement ahead of next Thursday’s full year results.

The announcement revealed that ANZ plans to book $360 million worth of charges against its full year profits.

Chief among the charges will be a $168 million charge made against its institutional markets unit. This comes as a result of an enhanced methodology for the calculation of derivative credit valuation adjustment, which determines the fair value of derivative instruments.

The improved methodology makes use of market credit information, more sophisticated exposure modelling, and it is aligned with leading market practice. $25 million of this charge relates to movements in credit valuation adjustments in the 2016 financial year. The remainder relates to a one-off adjustment for previous periods to mark to market the current derivative portfolio.

A further $100 million in restructuring charges will be made to support the evolution of the bank’s strategy. Management expects this to increase productivity through reshaping the workforce, while reducing both complexity and duplication.

The application of ANZ’s software capitalisation policy and adjustments related to the sale of the Esanda Finance division are also included within the $360 million of charges.

I believe these charges against its profits make it very unlikely that ANZ will be able to deliver on the market’s expectations now. According to the AFR, analysts had forecast for cash earnings to come in at $6.2 billion.

In light of this I wouldn’t be surprised to see the share price drop lower in trade today. As a result I would suggest investors keep their powder dry and hold off an investment in ANZ until after its full year results have been announced.

A better opportunity to invest may well present itself next week if it falls short of cash profit forecasts. In the meantime an investment in National Australia Bank Ltd. (ASX: NAB) may be a good option for income investors after its solid result yesterday.

Alternatively these fast-growing dividend shares could help you retire rich. Are they in your portfolio yet?

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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.

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