Australia and New Zealand Banking Group (ASX: ANZ) today announced its full year results for FY2017 with higher profits, despite declining net interest margins. Below is a summary:
- Cash profit up 18% to $6.938b
- Statutory profit up 12% to $6.406b
- Earnings per share up 17% to $2.371
- Return on equity increased to 11.9%
- Net interest margin fell to 1.99%
- Dividend flat
ANZ's increased profits come as the group reduces its Asia businesses and sells off other unproductive assets. The ongoing streamlining of the group has resulted in lower expenses and a higher Common Equity Tier 1 ratio.
ANZ now exceeds APRA's unquestionably strong 2020 capital target of 10.5%.
CEO Shayne Elliot stated the bank was "at the mid-point of executing a multi-year transformation of ANZ", so there should be further efficiency benefits to come.
However, Mr. Elliot also commented that intensifying domestic competition and regulatory effects will constrain bank industry revenue growth in the near-term.
While the market has applauded ANZ's transformation over the last 18 months, asset sales and cost-cutting measures are not sustainable in the medium to long-term.
Also of concern is the fall in the group's net interest margin; the profit spread between the bank paying interest on deposits and bonds and receiving interest on loans.
This is a key profitability indicator for banks and is unlikely to increase in Australia until the Reserve Bank of Australia raises the cash rate, which isn't happening any time soon.
Foolish takeaway
Despite Australia's soft economic conditions, I expect Australia's big banks to continue to increase underlying profits, albeit at low growth rates. The current theme among the Big 4 to cut-costs and sell less-productive assets should result in stronger banks for depositors and investors. Eventually, the stronger banks will be more profitable in a stronger business environment with rising interest rates.
