The Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price will be on watch on Monday.
This follows the release of the banking giant's first quarter market update this morning.
ANZ has tough start to FY 2022
ANZ's market update revealed that the bank has had a tough start to FY 2022.
According to the release, revenue within the bank's Markets business for the month of October was softer than expected given tough trading conditions. And while subsequent months have performed more in line with FY 2021 revenue trends, management warned that the softer start in October will likely impact its first half performance.
In addition, just like rival Westpac Banking Corp (ASX: WBC), ANZ revealed a reduction in its net interest margin (NIM) during the quarter. The bank reported an 8 basis points decline in its NIM (5 basis points on an underlying basis). This was largely driven by a lower exit rate at the full year and a continuation of the structural headwinds impacting the sector.
Rising rates offer some relief
Positively, the impact of rising rates, predominantly in New Zealand, and recent deposit pricing changes are expected to moderate these ongoing headwinds in the second quarter.
Another positive is that the bank has made solid progress in Australia to improve systems and processes for simple home loans. It advised that application times are now in line with other major lenders. In addition, efforts continue to improve response times for more complex home loan applications.
Speaking of home loans, ANZ's Australian home loans balance sheet grew slightly in the first quarter. And given the high levels of refinancing activity in the sector, the bank revealed that its management of both attrition and margins remain key areas of focus.
Though, one thing the bank is willing to take a hit on is the package offered within its Australian Retail & Commercial business. It is making changes from March that will provide customers with simpler and lower fee options. While it notes that this is better aligned to positive customer outcomes, the changes will have a negative transitional impact on other operating income in FY 2022 of ~$140 million. This will be spread evenly across the two halves.
Outside this, run-the-bank costs are expected to be broadly flat in the first half with investment spend higher as it invests in its business at a faster rate.
Credit quality opens the door to further capital returns
ANZ had a positive quarter in respect to credit quality. It advised that the credit quality environment has remained benign with a total provision release of $44 million during the quarter. This comprises a collective provision release of $122 million and an individually assessed provision of $78 million.
All in all, this led to the bank ending the period with a CET1 ratio of 11.65%. Management advised that this strong capital position continues to provide it with flexibility to return further surplus capital to shareholders. As a result, it is considering increasing the size of the current on-market buy-back. Though, any decision will balance the importance of capital efficiency against maintaining an appropriately strong balance sheet and continued monitoring of the economic situation.
