Shareholders will be breathing a little easier after Australia and New Zealand Banking Group (ASX: ANZ) reported a respectable increase in earnings that was a little ahead of consensus this morning. But this bank reporting season isn’t really about bottom lines per se. There are other things the market is paying more attention to at the moment and in ANZ Bank’s case, it’s the prospect of more share buybacks and management has come to the party empty-handed. It’s not that the bank could not afford to expand the ongoing $1.5 billion share buyback given the strength of its balance sheet…
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Shareholders will be breathing a little easier after Australia and New Zealand Banking Group (ASX: ANZ) reported a respectable increase in earnings that was a little ahead of consensus this morning.
But this bank reporting season isn’t really about bottom lines per se. There are other things the market is paying more attention to at the moment and in ANZ Bank’s case, it’s the prospect of more share buybacks and management has come to the party empty-handed.
It’s not that the bank could not afford to expand the ongoing $1.5 billion share buyback given the strength of its balance sheet with management posting a respectable 4.1% increase in the bank’s underlying cash profit to $3.49 billion for the six months to end March 2018.
The increase in earnings has helped bolster the bank’s Common Equity Tier-1 (CET) ratio to 11% from 10.1% in the first half of FY17.
But management has decided to take a more conservative approach and given the intense scrutiny that the bank and industry is under from the Banking Royal Commission, it’s understandable that they would have a bit of a siege mentality.
I can’t help but think that their spin-doctors advised them not to splash cash around during this trying period with ANZ Bank keeping its interim dividend flat at 80 cents a share even though the increase in profit should have theoretically allowed it to cough up a little more to appease embattled shareholders.
However, management did hint that shareholders can expect more buybacks or other capital management announcements after it completes further asset sales.
The second thing worth noting from the results is margin pressure as the bank reported a pretty significant 7 basis point decrease in net interest margin (NIM) to 1.93%.
This is more than what I was expecting (and I suspect it is more than what the market was expecting too) although the bank did point out that NIM would have only dipped 1 basis point if certain businesses were excluded. How convenient.
Rising costs is a growing issue in the sector, particularly as banks are facing rising funding costs and other expenses such as legal fees from the Royal Commission and lawsuits.
The third takeaway from ANZ Bank’s results is its outlook statement. Management is sticking with the “difficult trading conditions” mantra that it flagged since 2016.
That hasn’t stopped the bank from growing its cash profit though and some may be inclined to believe the momentum can be sustained.
If anyone can squeeze blood from stone, it’s our banks, so I won’t be surprised to see another increase in profits going forward.
But I suspect this is as good as it gets for ANZ Bank and its peers in terms of cash profit growth given the prospects of increasing costs, a slowing housing market, record high household debt and weak wages growth.
ANZ Bank’s results kicks off the bank reporting season with National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC) scheduled to announce their interim results over the coming days.
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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Macquarie Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.