May 2016 – Page 12 – Digital Finance Analytics (DFA) Blog

ANZ 1H 2016 Takes A Hit

ANZ has announced a statutory profit after tax for the half year ended 31 March 2016 of $2.7 billion down 22% and a cash profit of $2.8 billion down 24%, following a $717 million net charge primarily related to initiatives to re-position the Group for stronger profit before provisions growth in the future. The new CEO is clearing the decks!

The main hits came from the Institutional Bank and Specific Items as part of the banks refocus under the new CEO. Specific items are (on an after tax basis): an accounting change to the application of the Group’s software capitalisation policy ($441 million), impairment of the Group’s investment in AmBank ($260 million), a net gain in relation to Bank of Tianjin ($29 million) and Group restructuring expenses ($101 million), as well as the Esanda dealer finance sale ($56 million).

Excluding these Specified Items, allowing for better comparison with previous periods, adjusted pro-forma cash profit was $3.5 billion down 4% and profit before provisions was up 5%. Operating profit was $3,499m which was flat compared with 2H15, and down 4% from 1H15 ($3,676m).

Operating income lifted 4% from 1H15, to $10,438m, or 2% compared with 2H15. The main fall was in the Institutional bank.

Operating expenses fell on a restated basis, to $4,701m, down 1%, but is 3% higher compared with 1H15 ($4,572m). Expenses should fall further as the business is simplified.

The group net interest margin fell by 3 basis points, thanks to falls in New Zealand. NIM in Australia rose slightly.

The total provision charge of $918 million ($892 million individual provision charge $26 million collective provision charge) is consistent with ANZ’s ASX disclosure of 24 March and equates to a 32 basis point loss rate. The loss rate is trending towards the long term average from historically low levels. Gross impaired assets were $2.9 billion up 6%, with new impaired assets flat compared to the prior half.

Consumer loan impairment rose, whilst institutional and commercial were lower.

On a cash basis, the return on equity fell from 13.3% (2H15) to 9.7% in 1H16. On an adjusted basis, it fell from 13.2% to 12.2%.

Common equity tier 1 ratio is up, the international comparable Basel 3 ratio is 14.0% (up from 13.2% 2H15). Using the stricter APRA calculation, the ratio went from 9.59% to 9.81%. Significantly though when the IRB capital floor moves to 25%, from 1 July 2016, the ratio will fall to 9.21%.

The Interim Dividend of 80 cents per share fully franked is down 7% reflecting a move to gradually consolidate ANZ’s dividend payout ratio within its historic range of 60-65% of annual cash profit. The dividend payout ratio during the half of 84% primarily reflects the impact of specified items. On an adjusted pro-forma basis the ratio is 67%.

Looking in more detail at the Australian operations, with a focus on the mortgage book, home loan flows have been strong, with an 11% uplift from 1H15. ANZ has improved its share. 68% of flow were owner occupied loans (up from 57% IH15), and 53% of flow came via the broker channel. The total portfolio comprises of 48% via brokers, up slightly from 1H15. There has been a focus on growing share specifically in NSW.

Mortgage growth means that 43% of total group lending in home loan related, up from 39% in 1H15. LVR at origination, at 71% has not changed. Investment loans in the portfolio fell from 40% to 37% , whilst offset balances, and interest only loans rose. There was a reduction in households paying ahead, from 43% to 40%. The absolute home loan loss rate remains low.However, looking at credit risk in the book, 71% is home loan related. There is a fall in high LVR lending (in response to regulatory intervention). 90 day delinquencies for home loans in Australia is rising a little, but is low at 0.70%. Losses are higher in the corporate sector. We also see a rise in delinquencies in WA and QLD, as the mining down turn bites harder.

So, in summary, and looking beyond the noise of the restructure, underlying revenue and profit is in line with expectations, and the losses had been flagged previously. However, we see the same stresses in the Australian mortgage book – where more eggs are being placed. Any fall off of growth in mortgage lending, or rise in delinquencies will have a significant impact down the track. That said, the “stick to you knitting” strategy, with less focus on the more complex and risky Asian dimensions makes sense.

Auction Clearance Rates Up This Week

From Core Logic RP Data.

Preliminary results show 71.3 per cent of the 2,231 reported results were successful this week, up marginally from a final auction clearance rate of 69.7 per cent last week and lower when compared to one year ago (78.6 per cent). This week 2,651 capital city auctions were held, much higher than last week when 1,565 were held and comparable with the same time last year (2,540). Each individual capital city market has seen a rise in auction volumes over the week, while clearance rates have been somewhat varied.

Westpac 1H 2016 Results Underscores Tighter Banking Environment

Westpac Group has announced First Half results for 2016. Whilst statutory net profit was $3,701 million, up 3% over the prior corresponding period it was 16% down from 2H15. Cash earnings were $3,904 million, up 3% from 1H15, but down 3% from 2H15. Cash earnings per share was 118.2 cents, down 2% on 1H15 and down 7% on 1H16. Cash return on equity (ROE) was down 166 basis points from 1H15. and down 172 basis points from 2H15, to 14.2%. The interim, fully franked dividend was 94 cents per share (cps), up 1% on the 2015 interim dividend and in line with the 2015 final dividend. They lifted the payout ratio to around 80%.

The bank is having to work hard to maintain momentum, with the lower rates on deposits, the main lever. Tighter lending standards are showing in the Australian mortgage book, as are rising delinquencies. There are headwinds in the Institutional Bank and New Zealand. The question becomes, is it sustainable to pay current dividend rates into the future? Will 2H16 impairment charges be lower as the bank suggests? What will the next capital lifting initiatives be (they were silent on this, indicating they were in the top quartile of banks globally), given we expect ratios will be going higher.

Lending and customer deposit growth of 6% and 5% respectively. Net interest income was $7,653 million, up 10%, with net interest margin up 9 basis points. Total lending rose 6% from March 2015, with above system growth in Australian mortgages, up 8%, and Australian business lending rising 6%. Lending in New Zealand increased 7% in NZ dollars. The bank is heavily reliant on the performance of its mortgage book in Australia. Customer deposits increased $21.7 billion, or 5%, with the deposit to loan ratio at 69%.

Excluding Treasury and Markets, net interest margins were up 6 basis points. But NIM in New Zealand and Institutional Bank fell. Actually the biggest contribution was from reducing interest rates on deposits.

Non-interest income of $2,966 million was down 4%. Excluding infrequent and volatile items, most of the decline was due to lower Australian credit card interchange income and lower institutional fee income in line with more subdued debt origination

An improved expense to income ratio of 41.6%, down 3 basis points from 2H15, with expenses up 4%, mostly related to higher investment including increased technology and professional services costs

Stressed assets to total committed exposures falling 9 basis points to 1.03%. But impairment charges increased $326 million due to lower write-backs, increased provisions for a small number of larger institutional facilities, and from a modest rise in consumer delinquencies. An increase in the stressed exposures ratio of 4 basis points over Second Half 2015 principally reflects a rise in consumer delinquencies, including in geographies more affected by the slowdown in mining. We see mortgage deliquencies rising in WA and QLD (but a rise shows in all states, from a low base).

The credit quality of the Group’s portfolio was little changed since First Half 2015 with stressed exposures to total committed exposures of 1.03%, down from 1.12%. But Westpac Institutional Bank (WIB) was affected by lower net interest margins and significantly higher impairment charges related principally to four large exposures which added $252 million to provisions. Impaired assets remained low at 0.26% of total committed exposures, but was up 2 basis points over the year, while the provision coverage of impaired assets has remained high at 48%.

The Group raised around $6 billion in equity over calendar 2015, lifting the Group’s common equity Tier 1 ratio to 10.5%, up 171 basis points. On an internationally comparable basis, Westpac’s CET1 ratio was 14.7% and comfortably in the top quartile of banks globally.

There were no new capital raising initiatives announced this time, but the impact of the earlier entitlement offer can be seen in the results – lifting the capital ratio by 96 basis points.

Looking at the segmentals:

Consumer Bank continued to grow the value of the franchise, with more customers and above system lending growth contributing to a 15% rise in core earnings and a 16% rise in cash earnings. However, the impact of higher capital for mortgages reduced returns in this business. The business has continued to invest in improving service by transforming the network through the upgrade of 22 branches over the half, enhancements to self-serve options including more Smart ATMs, and increasing the functionality of its online platforms. We discuss the Australian mortgage book below.
Business Bank grew core earnings by 5%, with good growth in lending. Non-interest income grew 3%, mostly through higher merchant revenue supported by the roll-out of new state-of-the-art payment terminals. Cash earnings were lower, down 3%, due to higher impairment charges. While asset quality has improved, a reduction in write-backs and an increase in auto delinquencies contributed to a $118 million increase in impairments.
BT Financial Group continues to be a leading provider of wealth solutions in Australia, with a Funds Under Administration (FUA) share of 19.6%. BTFG saw cash earnings little changed over the year with business growth offset by a reduction in Funds Management earnings mostly due to lower markets and the partial sale of BTIM in Second Half 2015. The business continued to benefit from good flows into FUM and FUA, while continued success in Private Wealth has seen lending increase 8%. Insurance has also continued to expand with Life in-force premiums up 12%.
Westpac Institutional Bank delivered cash earnings of $517 million, down $136 million. The lower result was driven by a $201 million increase in impairment charges, a reduction in fund performance fees, and lower margins. The division maintained its leading market position, growing customer numbers and generating good flows in FX. However, the more challenging market conditions from high levels of global liquidity continues to place pressure on margins. While asset quality was maintained, including a further reduction in stressed assets, downgrades to a small number of exposures was the main contributor to the higher impairment charge.
Westpac New Zealand’s cash earnings were up 2% to NZ$445 million. The business has continued to grow broadly in line with system while steadily expanding its wealth and insurance business. However, intense competition for new lending and a shift to lower spread fixed rate mortgages has compressed margins. Notwithstanding deteriorating financial conditions in the dairy sector, asset quality has remained sound and consumer delinquencies remain near historic lows, contributing to continued low impairment charges.

Finally, we look at the Australian mortgage book, because this is such a large part of the banks business. Lending standards have been tightened. We see considerable growth, with a reduction in investment loans – after adjustments to 7.2% from 9.9% in September 2015.

They provided some detail in the portfolio, with 94% of the portfolio with a dynamic LVR of below 80% and 72% of borrowers ahead with repayments (many because they have an offset account). A greater flow of mortgages are coming via the broker channel ~50%. The average loan size is still rising and the average LVR falling a little. Actual mortgage losses are stilling at 2 basis points.

Looking at the investment portfolio, the average LVR of new loans is now 67%, down from 70% 1H15. The +90 day delinquency rates are at 38 basis points, compared with 31 basis points in 2H15. 62% of households are ahead with repayments (including offsets), down from 65% in 2H15.

Westpac is now working on a minimum floor rate of 7.25% and they have tightened serviceability criteria and have stopped lending to most non-resident customers.