The Australia and New Zealand Banking Group (ASX: ANZ) share price is paring gains as we head into the close and I think many have missed the mark when looking at its profit results today.
Shares in ANZ Bank are currently up 1% at $25.93 after rising as high as $26.16 as investors cheered the fact that its underlying cash profit was ahead of consensus. The bank also has room to undertake a capital return of some sort, which is more than what we can say about the other big banks.
But here's the issue. The quality of the result is poor as the better than expected cash profit isn't due to loan growth or expanding margins.
If anything, both have reversed and if that isn't bad enough, the deterioration accelerated in the second half.
On the flipside, the cash profit was significantly bolstered by a large lowering of provisions. Some of this can be explained by changes in its institutional business but in a climate where house price falls are getting worse, this stands at odds with falling provisions.
Bear in mind, that the full impact of slumping home prices and upcoming issues with refinancing isn't reflected in the FY18 results.
Looking at ANZ Bank's charts on benign delinquencies will give you a false sense of security.
I chatted with a managing director of a national mortgage broker recently and he commented that one-in-five of his customers can only get refinanced on much smaller loans as the big banks have tightened the loan approval process.
These borrowers will have to either cough up more cash to pay down the original loan or remain trapped with their current lenders who will very likely slug them with higher mortgage rates due to rising funding costs.
What's more alarming is that he thought the situation will get worse before it gets better.
I may be a shareholder in ANZ Bank but the result gives me little comfort despite claims by some experts that the depressed bank valuation already reflects the bad news.
It's a hollow reassurance. Valuations may reflect the current bad news, but I don't think it fully factors in potential upcoming issues in the market.
At least ANZ Bank shareholders can take comfort that the share price performance today isn't so bad when you compare it to National Australia Bank Ltd.'s (ASX: NAB) share price and Westpac Banking Corp's (ASX: WBC) share price as both stocks have slumped into the red.
NAB will report its results tomorrow followed by Westpac on Monday. Only Commonwealth Bank of Australia (ASX: CBA) won't report as it has already handed in its report card in August.
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