Company Results – Page 16 – Digital Finance Analytics (DFA) Blog

Westpac FY16 Profit Down 7% – Mortgage lending the pillar within the pillar!

Westpac Group today announced a Full Year 2016 statutory net profit of $7,445 million, down 7% compared to the prior corresponding period. However, cash earnings were $7,822 million, in line with the prior year, and above expectations, thanks mainly to a lower than anticipated impairment charge. The balance sheet remains strong, with NSFR above 100%. The Australian retail banking operations have been the pillar of the business, whilst wealth, institutional and insurance is under pressure. Mortgage lending is the pillar within the pillar!

It is worth saying that cash earnings is not a measure of cash flow or net profit determined on a cash accounting basis, as it includes non-cash items reflected in net profit determined in accordance with Australian Accounting Standards. So the specific adjustments include both cash and non-cash items. Cash earnings is reported net profit adjusted for material items to ensure they appropriately reflect profits available to ordinary shareholders. All adjustments shown are after tax.

Here is a quick summary of the results.

Total revenue was up 3%, with good growth in net interest income to $15,348 million, up 8%. The expense to income ratio at 42%, down 7 basis points.

Total lending rose 6%, with growth in Australian mortgages of 8% and Australian business lending rising 3%, with a skew to SME lending. New Zealand lending increased 9% in NZ$.

Loan growth was fully funded by customer deposits which increased by $39 billion, or 9%, with the deposit to loan ratio improving 2 percentage points to 70.5%.

Non-interest income of $5,855 million was down 7%. This reflects a range of infrequent and volatile items including lower revenue from BTIM following the partial sell down in the second half of 2015. Excluding infrequent and volatile items, most of the decline was due to lower markets activity — impacting fees in WIB — and lower cards-related income in the Consumer Bank;

The net interest margin was up 5 basis points to 2.13%. Excluding Treasury and Markets, net interest margin was up 3 basis points. During the second half the 3 basis point fall in the margin reflects the impact of higher funding costs and lower interest rates.

The expense to income ratio was 42%, with expenses up 3% in line with revenue growth. Regulatory and compliance costs added 1% to expense growth for the year.

The 49% rise in impairments compared to the prior corresponding period mostly reflects a small number of institutional exposures that were downgraded in the first half 2016.

However, the second half impairment charge of $457 million was 31% lower compared to the first half 2016. We wonder whether the divergence between stressed and impaired loans is sustainable.

Whilst credit quality remains sound, the level of stressed assets rose modestly over the year by 21 basis points to 1.20% at 30 September 2016. Second Half 2016 saw an increase in stressed exposures, reflecting continuing low prices for NZ dairy products and the ongoing impact of the slowdown in mining investment on some regions.

The cash return on equity (ROE) of 14.0%, down 185 basis points whilst the final, fully franked dividend of 94 cents per share (cps), taking total dividends paid for the year to 188 cps, was unchanged.

Common equity Tier 1 capital ratio of 9.5%, down 2 basis points, having raised around $3.5 billion in capital through the Entitlement Offer in November 2015.

On an internationally comparable basis, Westpac’s CET1 capital ratio was 14.4% Group implemented recent APRA requirements that increased RWA by $43 billion for Australian residential mortgages.

Looking at the performance of the business segments, there was strong growth in the retail franchise, especially in the Australian consumer bank.

However, conditions were tougher in the Wealth and Insurance businesses.

Net interest margin varies by segment.

Fee income rose in the Australian consumer and business banks.

Consumer Bank continued to build the value of the franchise, with record new customer acquisition and 8% loan growth, contributing to a 14% rise in cash earnings. However, growth slowed in the second half, in part reflecting the impact of higher funding costs and increased competition.

The business has continued to invest in service initiatives by improving its mobile banking apps and increasing the functionality of its online platforms. Consumer Bank remained disciplined on costs, with its cost to income ratio down 166 basis points to 40.8%.

Given the importance of the mortgage book to the bank, we note the book grew from $375.8 bn in Sep 15 to $404.2 bn in Sept 16. They showed that $35.1bn are offset, including current account balances.

They had a flow of new mortgages of $41.8 in 2H. 39.5% are investment loans, no change on last year, and are growing at 5.9% currently. The share of loans via the broker channel have risen from 41.8% to 44.1% since last year. 83% are variable rate loans.

The average LVR of new loans is 70%. 72% of households are ahead with payments. Australian mortgage 90+ day delinquencies have increased 21 basis points compared to 2015, including 13 basis points from changes in how loans to customers that have been granted hardship assistance are reported.

Actual mortgage losses remain at 2 basis points, but delinquency continues to rise in WA.

There are only 262 houses in possession in a mortgage book which comprises 1.6 million mortgages; with losses in the portfolio equivalent to 0.02%.

In terms of mortgage underwriting, they have had a minimum assessment (floor) rate 7.25% and buffer rate of at least 2.25% since September 2015. They have tightened policy on assessment of living expenses and income since verification in November 2015 and are discounting of rental income, annuity and pension income increased for certain loans since January 2016.

In addition, non-resident and ex-pat lending has been tightened, from April 2016, non-resident customers no longer qualify for mortgage
loans (limited exceptions) and for Australian and NZ citizens and permanent visa holders using foreign income, tightened verification processes and LVR restricted to 70% maximum.

Different rates for investment property loans and interest only
repayment types progressively introduced from August 2015.

Following guidance from APRA the industry is aligning treatment of hardship in delinquencies. Westpac changed measurement and
delinquency treatment of new hardship accounts in 1H16. No impact on the risk profile of the Group or asset classes. At the same time, hardship policies have tightened. An account in hardship is no longer frozen and
continues to migrate through delinquency buckets until 90+ days. Accounts continue to be reported as delinquent until the customer has maintained repayments for 6 months – called the ‘serviceability period’. The average hardship period granted is 3-4 months, so the hardship + serviceability period = 10 months average.

Business Bank grew core earnings by 5%, with 5% growth in lending, including 8% growth in business lending to small and medium enterprises. This reflects success in strengthening the franchise, including investing in improved digital platforms for both customers and bankers, with LOLA originating $1.4 billion in new lending to date. Revenue was up 5%, while cost growth was contained to 4% despite significant investment in digital applications. Cash earnings growth was lower at 1%, due to higher impairment charges. This largely reflects lower write-backs than previous years, and increased provisions for auto finance and those sectors and regions that are affected by the slowdown in mining investment.

BT Financial Group achieved significant strategic milestones, although cash earnings were 4% lower due to the partial sale of BTIM, lower Ascalon contribution, and higher regulatory costs. Excluding the impact of the partial sale of BTIM in 2015, cash earnings reduced by 2%. BTFG has delivered important new core capabilities through the development of its Panorama platform, as well as significantly expanding its insurance product offering and growing FUM and FUA by 5% and 7% respectively.

Westpac Institutional Bank continues to face both structural and cyclical pressures with cash earnings down 18%. The lower result was driven by a $215 million increase in impairment charges and reduced fee income from subdued lending and markets activity. Markets income was $109 million higher due to the absence of the derivative valuation impact last year. While margins were lower over the year, WIB’s margin stabilised in the second half, expanding by 4 basis points. Despite difficult conditions, WIB was disciplined on balance sheet growth and costs, while continuing to support key customers. WIB’s asset quality remains sound. However, provisions for four large names in First Half 2016 and lower write-backs and recoveries saw an impairment charge of $177 million, compared to an impairment benefit of $38 million in full year 2015.

Westpac New Zealand’s cash earnings decreased 4% to NZ$872 million. Loans grew 9%, however, intense competition for new lending and a shift to lower-spread fixed rate mortgages has compressed margins. Weak financial conditions in the dairy sector drove stressed assets to TCE up 94 basis points to 2.54%. Impairment charges increased $12 million as a result of the increased stress in the dairy portfolio and also from a lower level of write-backs and recoveries compared to the prior corresponding period.

Genworth 3Q16 Hit By Lower LVR Loans and Higher Claims

Whilst Lenders Mortgage Insurer Genworth renewed their important CBA contract, today’s 3Q results show the impact of the fall in high LVR lending and change in business mix. Of course some lenders are holding more LMI business within their own captive insurers. It also confirms rising defaults, especially in Queensland and Western Australia and in particular in mining related regions.

If high LVR lending continues to fall thanks to regulatory intervention, the LMI’s will remain under pressure. The stability of LMI’s is important for the overall financial stability of the banking sector thanks to their high mortgage exposures. Data from APRA shows the shift in loan mix.

New business volume, as measured by New Insurance Written (NIW), of $6.1 billion in 3Q16, decreased 28.2 per cent compared with the previous corresponding period (pcp). Year-to-date NIW of $20.1 billion is down 23.3 per cent on the pcp.

Gross Written Premium (GWP) decreased 25.8 per cent to $92.5 million in 3Q16. Year-to-date GWP is 31.2 per cent lower than the pcp.This reflects a number of factors including reduced high-LVR penetration in the market, a lower LVR mix of business, as well as the full impact of the changes in customers in 2015.

Net Earned Premium (NEP) decreased 6.5 per cent to $115.9 million in 3Q16 compared with the pcp reflecting an adjustment to the NEP earnings curve implemented in 3Q15. Year-to-date NEP is down 1.4 per cent on the pcp.

The normalised loss ratio rose to 45.3 per cent in 3Q16 from 26.0. The number of claims paid rose from 286 (2Q16) to 321 3Q16. The average claim paid was $73k.

The overall portfolio continues to be supported by strong performance in New South Wales and Victoria. However, the performance in Queensland and Western Australia is still challenging, reflecting increased delinquencies, particularly in regions exposed to the slowdown in the resources sector as the economy in those areas navigates through a period of transition.

The expense ratio in 3Q16 was 25.8 per cent compared with 25.7 per cent in the pcp. The steady expense ratio reflects a continued focus on expense management. Genworth continues to manage the business with a target expense ratio of 26-28 per cent in 2016. Investment income of $36.3 million in 3Q16 included a pre-tax mark-to-market loss of $0.9million.

As at 30 September 2016, the value of Genworth’s investment portfolio was $3.5 billion, more than 95 per cent of which continues to be held in cash and highly rated fixed interest securities. As at 30 September 2016, the Company had invested $171 million in Australian equities in line with the previously stated strategy to improve investment returns on the portfolio within acceptable risk tolerances.

After adjusting for the mark-to-market movements, the 2016 year-to-date investment return was 3.51 per cent per annum, down from 3.70 per cent per annum in the pcp. As at 30 September 2016, the Company’s regulatory solvency ratio was 1.55 times the Prescribed Capital Amount (PCA).

The Board continues to target a capital range of 1.32 to 1.44 times the PCA ona Level 2 basis. The Company continues to focus on optimising its capital structure and is evaluating capital management initiatives that could be implemented in the future.

Genworth expects 2016 NEP to decline by approximately 5 per cent and for the full year loss ratio to be approximately 35 per cent. The Board continues to target an ordinary dividend payout ratio range of 50 to 80 per cent.

Suncorp 1Q Update – The Pressure Continues

Suncorp provided their quarterly statutory update today, as at 30
September 2016. Once again we see the pressure on regional players. Some relief may emerge when they move formally to advanced accreditation with APRA. Risks include a rise in bad debts, and the possibility of higher insurance claims though the summer storm period.

Suncorp’s lending assets remained broadly flat over the quarter at $54.1 billion, as the Bank actively managed volume and margin in a price driven market. Home lending was down 0.7% in the quarter, whilst business lending rose 1.5%. They have a 66% deposit to loan ratio.

Credit quality remained strong with gross non-performing loans decreasing 4.8% over the quarter to $581 million. Impairment losses of $10 million for the quarter represent an annualised 7 basis points of gross loans and advances, below the Bank’s 10 to 20 basis points expected operating range.

Gross impaired assets increased by $14 million to $220 million during the quarter, representing 0.41% of gross loans and advances. Whilst there is evidence the slowdown in the resource sector has had downstream impacts in some regional centres in Queensland, the impact is limited to a small number of exposures. The increase in the September quarter was driven by one mid-sized Commercial/SME loan with an indirect exposure to the downturn in the Queensland resources sector.

The balance of past due loans that are not impaired decreased by 10.6% to $361 million as at 30 September 2016. Retail past due loans decreased by $39 million to $319 million over the quarter. The favourable movement follows the embedding of enhancements to the collections system and processes that were disclosed with previous financial results.

Suncorp Banking & Wealth CEO David Carter said the Bank remained committed to driving sustainable growth, while prudently managing risk, liquidity and the funding mix. The Net Stable Funding Ratio (NSFR) was 111% at 30 September.

Modest growth in business lending continued during the quarter, with the commercial portfolio increasing 1.8% to $5.5 billion and agribusiness growing 1.1% to $4.4 billion. They are $480m in development finance across units, townhouses and other residential.

The home lending portfolio contracted marginally to $43.9 billion, as the Bank remained focused on sustainable and profitable lending. Since last year it has grown at 2.3%, well below the ~6.5% system rate. The quality of the lending portfolio remained favourable across a range of measures including quantitative serviceability parameters, credit quality and loan to value ratio (LVR), with 80% of new loans having a LVR of 80% or less.

Consistent with others in the market the Bank saw a sharp increase in term deposit funding costs following the May RBA rate cut. Whilst some of that pressure has recently abated, average funding costs will be higher than originally expected this half.

The capital position of the Bank is robust with a Common Equity Tier 1 (CET1) ratio of 8.92% as at 30 September 2016, at the upper end of the 8.5% to 9% target.

They continue discussions with APRA towards achieving Advanced Accreditation. Meantime, they are operating as an Advanced Bank, with strong risk management and advanced models in use across the business.

ANZ FY16 Results – Back To Basics

ANZ today announced a Statutory Profit after tax for the Financial Year ended 30 September 2016 of $5.7 billion down 24% and a Cash Profit of $5.9 billion down 18%. It is a complex picture thanks to restructuring, re-balancing and rising provisions.

They are betting the bank on growing the Australian business, which now comprises 62% mortgage lending, as they exit areas of business in Asia, and restructure, to a simpler, and perhaps more profitable enterprise.

They say the FY16 result reflects a good performance in ANZ’s core domestic franchises and significant reshaping of the business driven by ANZ’s strategic focus to create a simpler, better capitalised and more balanced bank that produces better outcomes for customers and shareholders.

The result reflects an emphasis on delivering strong capital and cost management outcomes together with $1,077 million of charges (after tax) for specified items primarily related to reshaping the Group to position it for improved performance in future years.

Adjusted Pro-Forma Cash Profit was $7.0 billion down 3%, while Profit before Provisions increased 6% as the benefits of simplification and re-balancing initiatives began to emerge.

Return on equity was stable in the second half of the financial year at 12.2% (adjusted Pro-forma Cash Profit basis). The Final Dividend of 80 cents per share is consistent with guidance provided at the Interim Profit announcement. The Total Dividend for FY16 is 160 cents per share fully franked down 12%.

At the 2016 Interim Result, ANZ advised that it was conducting strategic reviews of the Group’s Retail and Wealth business in Asia, and its Wealth businesses in Australia and New Zealand. The reviews considered each business within the context of the overall Group strategy including capital efficiency.

ANZ announced on 31 October 2016 that it had entered into an agreement with DBS to sell the Retail and Wealth businesses in Singapore, Hong Kong, China, Taiwan and Indonesia. ANZ intends to clarify plans for the remaining businesses in Retail and Wealth in Asia during FY17.

The strategic review of ANZ’s Wealth businesses in Australia and New Zealand concluded that while the distribution of high quality Wealth products and services should remain a core component of the Group’s overall customer proposition, ANZ does not need to be a manufacturer of Life and Investments products.

The initial focus will be on the Australian Wealth business where ANZ is exploring a range of possible strategic and capital market options that will maintain strong outcomes for customers. This includes the possible sale of the life insurance, advice and superannuation and investments businesses in Australia.

ANZ will pursue a disciplined approach to this process and will update the market as appropriate. The Wealth business in New Zealand will be considered separately during 2017.

Net Interest income was up 3%, to $15,095m from FY15, whilst other operating income fell 16% to $5,434m, so combined, operating income was down 3%.

Operating expenses rose 11% to $10,422m, whilst credit impairment charges rose 64% to $1,929m. Group net interest income fell 4 basis points, and whilst there were falls in NZ, (down 9 basis points), Institutional rose 14 basis points and Australian nim was static, thanks to repricing in the book.

In FY16 ANZ recognised the impact of a number of items collectively referred to as Specified Items which form part of the Group’s Cash Profit. The items are primarily related to initiatives undertaken to re-position the Group for stronger profit before provisions growth in the future.

ANZ recorded $1,077 million (after tax) of specified items charges in Cash Profit during the Financial Year, of which almost half ($522 million) related to a change in the application of the software capitalisation policy. This change in policy effected a 24% reduction in the Capitalised Software
balance year on year.

One third of the specified items charges occurred in the second half, including an additional restructuring charge of $100 million (post tax) and a derivative credit valuation adjustment (CVA) of $168 million (after tax).
The restructuring charge supports the evolution of the Group’s strategy and will underpin further productivity through reshaping of the workforce to reduce complexity and duplication, and to align with the changing emphasis in Institutional. ANZ has refined the methodology for the calculation of CVA, a component of valuing derivative instruments in the Markets business. The updated methodology makes greater use of market credit information and more sophisticated exposure modelling and is in line with leading market practice.

Adjusted Pro-Forma Cash Profit information has also been provided to allow the market to better analyse the ongoing operations of the Group. Looking at a cash result basis (which excludes non-core items included in statutory profit), operating income was flat compared with last year at $20,577m, whilst expenses rose 11% to $10,422m and impairments rose 62% to 1,956m. This translated to a cash profit down 18% to $5,889m.

The total provision charge of $1.96 billion ($1.94 billion individual provision charge and a $17 million collective provision charge) equates to a loss rate of 34 basis point of which 3 bps is attributable to the recently announced settlement of the Oswal case. Gross impaired assets increased to $3.17 billion with new impaired assets up 3% compared to the prior half.While in aggregate the credit environment is broadly stable, pockets of weakness continue to work their way through the economy, largely reflecting stress moving through the resources and resources related sectors. The stress appears to have now largely passed through the Institutional market and is progressively moving through the Commercial and Retail sectors. ANZ therefore expects provision charges to remain broadly the same in the 2017 Financial Year as a percentage of
gross lending assets.

The APRA CET1 capital ratio at 30 September was 9.6% (14.5% on an Internationally Comparable basis). Organic capital generation of 106 basis points in the second half was 33 basis points higherthan the second half average of the past 4 years, primarily driven by Credit RWA reduction (excluding foreign exchange impacts) of $12 billion in the Institutional business.

The Final Dividend of 80 cents per share is the same as for the first half and is in line with guidance. The total dividend for FY16 of 160 cents per share represents a Dividend Payout Ratio of 81.9% on a Statutory Profit basis and 79.4%on a Cash Profit basis.

ANZ is gradually consolidating to its historical payout range of 60-65% of annual Cash Profit which ANZ believes provides a more sustainable base reflecting the greater demands for capital arising from increased regulatory requirements. On an Adjusted Pro-forma Cash Profit basis the Dividend Payout Ratio was 67.1%.

Looking at the segmentals, the Australian business grew income 8.8% to $9,365m, NZ 3.1% whilst the Institutional Bank income fell 6.1%.

They highlight that mortgage funding costs rose, relative to the RBA cash rate, mainly thanks to increased competition for deposits.

The Australian mortgage book grew 7%, but below system from $231bn in FY15 to $246bn in FY16. They increased their footprint in NSW and VIC, relative to WA and QLD. The mix of investor loans however fell, from 37% to 29% in FY16. 52% of loans are broker originated, up from 48% last year. Mortgage lending now accounts for 62% of all Australian lending, up form 60% last year.

Looking at the mortgage portfolio, 39% of households are ahead with repayment, down from 42% last year. 37% are interest only loans (same as last year). Delinquencies vary by state, with a significant spike in WA and QLD.

They have made changes to their lending standards. In terms of serviceability, they now apply an interest rate floor to new and existing mortgage lending introduced at 7.25%. They introduced of an income adjusted living expense floor (HEM) and a 20% haircut for overtime and commission income, as well as increasing income discount factor for residential rental income from 20% to 25%

They changed their lending policy to include a LVR cap reduced to 90% for investment loans, LVR cap reduced to 70% in high risk mining towns, decreased maximum interest only term of owner occupied interest only loans to 5 years, withdrawal of lending to non-residents, limited acceptance of foreign income to demonstrate serviceability and tightened controls on verification and tightening of acceptances for guarantees.

[This of course won’t necessarily apply to loans already on book].

They say the end-to-end home lending responsibility managed within ANZ, they have effective hardship & collections processes, and ANZ assessment process apply across all channels.

RBS Reports Loss of £469 million in Q3 2016

UK Bank, Royal Bank of Scotland has reported an operating profit before tax of £255 million, but an attributable loss of £469 million in Q3 2016.

This included restructuring costs of £469 million, litigation and conduct costs of £425 million (relating to US residential mortgage backed securities) and a £300 million deferred tax asset impairment.

This compared with a profit of £940 million in Q3 2015 which included a £1,147 million gain on loss of control of Citizens.

They reported a Common Equity Tier 1 ratio of 15.0% which increased by 50 basis points in the quarter and remains ahead of their 13% target.

The leverage ratio increased by 40 basis points to 5.6% principally reflecting the £2 billion Additional Tier 1 (AT1) issuance.

RBS reported an attributable loss of £469 million in Q3 2016 compared with a profit of £940 million in Q3 2015 which included a £1,147 million gain on loss of control of Citizens. Q3 2016 included a £469 million restructuring cost, £425 million of litigation and conduct costs and a £300 million deferred tax asset impairment. The attributable loss for the first nine months of the year was £2,514 million and operating loss before tax was £19 million.
Q3 2016 operating profit of £255 million compared with an operating loss of £14 million in Q3 2015. Adjusted operating profit of £1,333 million was £507 million, or 61%, higher than Q3 2015 reflecting increased income and reduced expenses.
Income across PBB and CPB was 2% higher than Q3 2015, adjusting for transfers, and was stable for the year to date, as increased lending volumes more than offset reduced margins. CIB adjusted income increased by 71% to £526 million, adjusting for transfers, the highest quarterly income for the year, driven by Rates, which benefited from sustained customer activity and favourable market conditions following the EU referendum and central bank actions.
NIM of 2.17% for Q3 2016 was 8 basis points higher than Q3 2015, as the benefit associated with the reduction in low yielding assets more than offset modest asset margin pressure and mix impacts across the core franchises. NIM fell 4 basis points compared with Q2 2016 reflecting asset and liability margin pressure.
PBB and CPB net loans and advances have increased by 13% on an annualised basis since the start of 2016, with strong growth across both residential mortgages and commercial lending.
Excluding expenses associated with Williams & Glyn, write down of intangible assets and the Q2 VAT recovery, adjusted operating expenses have been reduced by £695 million for the year to date. Adjusted cost:income ratio for the year to date was 66% compared with 67% in the prior year. Across PBB, CPB and CIB cost:income ratio of 60% year to date was stable compared with 2015.
Restructuring costs were £469 million in the quarter, a reduction of £378 million compared with Q3 2015. Williams & Glyn restructuring costs of £301 million include £127 million of termination costs associated with the decision to discontinue the programme to create a cloned banking platform.
Litigation and conduct costs of £425 million include an additional charge in respect of the recent settlement with the National Credit Union Administration Board to resolve two outstanding lawsuits in the United States relating to residential mortgage backed securities.
RBS has reviewed the recoverability of its deferred tax asset and, in light of the weaker economic outlook and recently enacted restrictions on carrying forward losses, an impairment of £300 million has been recognised in Q3 2016. This action has reduced TNAV per share by 3p.
TNAV per share reduced by 7p in the quarter to 338p principally reflecting the attributable loss, 4p, and a loss on redemption of preference shares, 4p, partially offset by gains recognised in foreign exchange reserves.

Macquarie 1H17 Result – $A1,050 million Net Profit

Macquarie Group today announced a net profit after tax attributable to ordinary shareholders of $A1,050 million for the half-year ended 30 September 2016 (1H17), down two per cent on the half-year ended 30 September 2015 (1H16) and up six per cent on the half-year ended 31 March 2016 (2H16).

Net operating income of $A5,218 million for 1H17 was down two per cent on 1H16, while total operating expenses of $A3,733 million were up one per cent on 1H16. Around 60% came from international sources.

Macquarie’s annuity-style businesses (Macquarie Asset Management, Corporate and Asset Finance and Banking and Financial Services), which represent approx. 70% of the Groups’ performance, continued to perform well with a full period contribution from AWAS/Esanda as well as a gain on the disposal of Macquarie Life compared to a pcp which benefited from significant performance fees in MAM (1H16) and gave a combined net profit contribution of $A1,639 down 15% on 1H16 and up 36% on 2H16.

Macquarie’s capital markets facing businesses (Macquarie Securities Group, Macquarie Capital and Commodities and Financial Markets) benefited from lower impairments and increased principal realisations in MacCap and CFM, offset by lower trading activity gave a combined net profit contribution of $A695m broadly in line with 1H16 and up 15% on 2H16.

Operating expenses were $A3,733m, up 1% on 1H16 and up 9% on 2H16.

Macquarie announced an interim ordinary dividend of $A1.90 per share (45 per cent franked), up from the 1H16 dividend of $A1.60 per share and down from the 2H16 dividend of $A2.40 per share, both 40 per cent franked. This represents a payout ratio of 62 per cent.

Key drivers of the change from the prior corresponding period (1H16) were:

An 18 per cent decrease in combined net interest and trading income to $A1,864 million, down from $A2,273 million in 1H16. The reduction was across a number of operating groups. MSG was impacted by limited trading opportunities due to market uncertainty. In CAF, there was an overall decline in net interest and trading income mainly driven by the timing of prepayments and realisations, and lower loan volumes in the Lending portfolio, as well as increased funding costs due to the AWAS portfolio acquisition, partially offset by the contribution from the Esanda dealer finance portfolio. CFM also reported lower net interest and trading income compared to 1H16 due to reduced client flow, particularly in oil. Partially offsetting these declines was increased net interest and trading income in BFS, mainly driven by volume growth in the Australian loan and deposit portfolios
A 21 per cent decrease in fee and commission income to $A2,202 million, down from $A2,794 million in 1H16. Performance fees were $A170 million in 1H17, down 73 per cent on 1H16 which benefited from significant performance fees of $A629 million, while mergers and acquisitions, advisory and underwriting fees of $A471 million in 1H17 decreased 12 per cent from $A537 million in 1H16 due to more subdued equity capital markets activity in most key regions. Brokerage and commissions income of $A419 million was also down on 1H16 as market uncertainty impacted the levels of client trading activity, particularly in Asia.
A 20 per cent increase in net operating lease income to $A476 million, up from $A397 million in 1H16, mainly driven by the AWAS portfolio acquisition in CAF.
Other operating income of $A684 million in 1H17 increased significantly from a charge of $A83 million in 1H16. The primary drivers were increased gains on the sale of investments and businesses; and lower provisions for impairment mainly due to reduced exposures to underperforming commodity-related loans in CFM. Gains on the sale of businesses and investments included a significant gain from BFS’ sale of Macquarie Life’s risk insurance business, as well as increased contributions from Macquarie Capital, CFM and MAM, partially offset by a loss on the sale of BFS’ US mortgages portfolio.
Total operating expenses increased one per cent, driven by increased non-salary technology expenses mainly due to elevated project activity as well as a change in approach to the capitalisation of software expenses in relation to the Core Banking platform in BFS, offset by decreased brokerage, commission and trading-related expenses mainly due to decreased trading-related activity, while employment expenses remained broadly in line with 1H16.

Staff numbers were 13,816 at 30 September 2016, down from 14,372 at 31 March 2016.

The income tax expense for 1H17 was $A438 million, down 17 per cent from $A530 million in 1H16 mainly due to a decrease in operating profit before income tax, as well as changes in the geographic composition of earnings, with increased income being generated in Australia and the UK, and lower income in the US. The effective tax rate of 29.4 per cent was down from 33.1 per cent in 1H16.

Total customer deposits increased by 5.7 per cent to $A46.1 billion at 30 September 2016 from $A43.6 billion at 31 March 2016. During 1H17, $A4.0 billion of new term funding was raised covering a range of sources, tenors, currencies and product types.

Macquarie Group’s financial position comfortably exceeds APRA’s Basel III regulatory requirements, with Group capital surplus of $A3.7 billion at 30 September 2016, which was down from $A3.9 billion at 31 March 2016.

The Bank Group APRA Basel III Common Equity Tier 1 capital ratio was 10.4 per cent (Harmonised: 12.6 per cent) at 30 September 2016, down from 10.7 per cent at 31 March 2016. The Bank Group’s APRA leverage ratio was 5.6 per cent (Harmonised: 6.5 per cent) and average LCR was 169 per cent.

Operating group performance

Macquarie Asset Management delivered a net profit contribution of $A857 million for 1H17, down 25 per cent from $A1,139 million in 1H16, and up 70 per cent from $A505 million in 2H16, mostly due to performance fees and investment-related income. Performance fee income in 1H17 decreased 72 per cent from a particularly strong 1H16 of $A609m, and increased 102 per cent from $A84 million in 2H16, and included performance fees from Macquarie Atlas Roads (MQA), Macquarie Korea Infrastructure Fund (MKIF), Australian managed accounts and from co-investors in respect of infrastructure assets. Investment-related income included gains from the partial sale of MIRA’s holding in MQA, gains on sale of unlisted real estate holdings in MIRA and income from the sell down of infrastructure debt in Macquarie Specialised Investment Solutions (MSIS). Base fee income was broadly in line as investments made by MIRA-managed funds, growth in the MSIS Infrastructure Debt business and positive market movements in MIM, were largely offset by small net AUM outflows in the MIM business, asset realisations by MIRA-managed funds and foreign exchange impacts. Assets under management of $A491.3 billion decreased two per cent on 30 September 2015.

Corporate and Asset Finance delivered a net profit contribution of $A521 million for 1H17, down 15 per cent from $A611 million in 1H16. The decrease was mainly driven by lower income due to the timing of prepayments and realisations as well as lower loan volumes, which resulted in a reduced contribution from the Lending portfolio. This was partially offset by profit from the AWAS portfolio acquisition and the acquisition of the Esanda dealer finance portfolio in the prior year. The AWAS and Esanda acquisitions have been successfully integrated and continue to perform in line with expectations. CAF’s asset and loan portfolio of $A38.1 billion increased 17 per cent on 30 September 2015.

Banking and Financial Services delivered a net profit contribution of $A261 million for 1H17, up 54 per cent from $A170 million in 1H16. The improved result reflects increased income from growth in Australian lending, deposit and platform volumes, as well as a gain on sale of Macquarie Life’s risk insurance business.

This was partially offset by a loss on the disposal of the US mortgages portfolio, increased costs mainly due to elevated project activity as well as a change in approach to the capitalisation of software expenses in relation to the Core Banking platform, and increased impairment charges on loans, equity investments and intangible assets ($A78m). BFS deposits of $A42.2 billion increased nine per cent on 30 September 2015 and funds on platform of $A62.1 billion increased 33 per cent on 30 September 2015. The Australian mortgage portfolio of $A28.6 billion increased four per cent on 30 September 2015, representing approximately two per cent of the Australian mortgage market. Business lending grew by 8%.

Macquarie Securities delivered a net profit contribution of $A18 million for 1H17, down from $A240 million in 1H16. 1H16 benefited from strong trading revenues, particularly in Asia, while trading opportunities in 1H17 were limited due to market uncertainty. Macquarie was ranked No.1 in Australia for IPOs and No.2 for equity, equity-linked and rights deals in calendar year 2016.

Macquarie Capital delivered a net profit contribution of $A205 million for 1H17, up 21 per cent from $A170 million in 1H16. The increase was predominately due to increased income from principal realisations, lower M&A, advisory and underwriting fees and increased operating expenses. During 1H17, Macquarie Capital advised on 201 transactions valued at $A65 billion including being adviser to Brookfield Infrastructure, together with its institutional partners, on the acquisition of Asciano Limited; adviser on behalf of Seoul Tunnel Co., Ltd. in connection with Seoul Jemulpo Tunnel Project; adviser to Siris Capital on its acquisition of Polycom and sole bookrunner and sole lead arranger on the debt financing to support the acquisition; and capital raising and acquisition in conjunction with CFM of a 50 per cent principal investment in the 299MW Tees Renewable Energy Plant.

Commodities and Financial Markets delivered a net profit contribution of $A472 million for 1H17, up 67 per cent from $A282 million in 1H16. The result reflects an increase in income generated from the sale of equity investments and a reduction in provisions for impairment compared to prior periods. This was partially offset by reduced commodities-related net interest and trading income compared to 1H16, which benefited from higher levels of volatility across a number of commodities, particularly oil. CFM continued to experience strong results across the energy platform, particularly from Global Oil and North American Gas, and increased customer activity in foreign exchange, interest rates and futures markets due to ongoing market volatility. Macquarie Energy maintained its Platts ranking of No.3 US physical gas marketer in North America.

Outlook

Macquarie currently expects the year ending 31 March 2017 (FY17) combined net profit contribution from operating groups to be broadly in line with the year ended 31 March 2016 (FY16).

The FY17 tax rate is currently expected to be broadly in line with FY16.

Accordingly, the Group’s result for FY17 is currently expected to be broadly in line with FY16.

The Group’s short-term outlook remains subject to a range of challenges including:

market conditions
the impact of foreign exchange; and
potential regulatory changes and tax uncertainties

Mr Moore said: “Macquarie remains well positioned to deliver superior performance in the medium-term due to its deep expertise in major markets, strength in diversity and ability to adapt its portfolio mix to changing market conditions, the ongoing benefits of continued cost initiatives, a strong and conservative balance sheet and a proven risk management framework and culture.”

AMP Significant Reinsurance Deal Announced, Takes Hit

AMP Limited today provided an update on its Australian wealthprotection business and reported cashflows and assets under management (AUM) for the thirdquarter to 30 September 2016.

In addition, AMP announced two significant actions as part of its update to address the marketconditions for wealth protection in Australia:

the implementation of a significant reinsurance arrangement with Munich ReinsuranceCompany of Australasia Limited (Munich Re), and

strengthening of best estimate assumptions across both AMP Life and NMLA effective31 December 2016.

AMP Chief Executive Craig Meller said: “We’ve seen consistent deterioration in the insurance sector over the course of 2016 and, despite the progress on claims transformation to date, it has significantly impacted the performance of our wealth protection business.

“Today’s actions are designed to re-set the wealth protection business. They will improve the group’s earnings stability, free-up capital and help bring into focus the growth potential of AMP.

“While cashflows remained subdued during the third quarter, they were impacted by the ongoing uncertainty in superannuation legislation leading to lower consumer confidence in the system,advisers adjusting to the enhanced regulatory environment and recent investment market volatility

“However AMP is optimistic that the recent superannuation reforms will reverse this trend.”

Business update for the Australian wealth protection business

The series of actions AMP announced today will, subject to regulatory approval, release capitalfrom the wealth protection business and provide greater earnings stability across the group.In more detail they are:

Significant reinsurance deal

AMP’s focus is to reposition the wealth protection business in Australia as significantly less capitalintensive with market-leading products and a transformed claims philosophy and process.

AMP Life has executed a binding quota share agreement with Munich Re to reinsure 50 per cent of $750 million of annual premium income of the AMP Life retail portfolio (including income protection and lump sum business). The agreement will commence on 1 November 2016.

The agreement creates the potential to release up to $500 million of capital from AMP Life subject to regulatory approval. This initial tranche of reinsurance will reduce the magnitude of earnings volatility from the Australian wealth protection business for the AMP group.

The estimated net impact from the agreement on the Australian wealth protection business profit margins is a $25 million reduction annually from FY 17.

AMP intends to pursue further tranches of reinsurance when time and conditions suit.

Strengthening of best estimate assumptions and goodwill impairment

The challenges AMP has faced in its Australian wealth protection business over the last three years have been accentuated in 2016 by deteriorating experience across the life insurance sector.

This has been driven by a range of factors in a period of unprecedented external scrutiny.

This trend has continued into Q3 2016 resulting in an experience loss of $44 million.

Having reviewed experience against long-term trends, AMP has come to the view that the current trends are structural in nature. In response, AMP expects to strengthen best estimate assumptions across both AMP Life and NMLA (including retail and group income protection, claims and lapses)from year end.

As a result, the following underlying profit impacts are anticipated:

capitalised losses and other one off experience items in the order of $500 million in FY 16,and

reduction in Australian wealth protection profit margins for FY 17 in the order of $65 million.

The anticipated assumption changes will reduce the Australian wealth protection embedded value at FY 16 by approximately $1.0 billion at a 5 per cent discount margin. The reinsurance agreement results in a negligible change in embedded value (prior to any capital release from AMP Life).

Goodwill attributable to the Australian wealth protection business is expected to be fully impairedby $668 million when preparing the 2016 year-end financial statements. This reflects a decline inthe potential recoverable amount for the Australian wealth protection business in line withreductions in embedded value.

The impairment charges will not impact AMP’s FY 16 underlying profit.

Note that all items above are approximate, unaudited and subject to change as full year reporting processes are completed. The Part 9 consolidation of NMLA with AMP Life is on track and will notbe impacted by the assumption changes or goodwill impairment.

Wealth protection experience for Q3 2016

Experience losses for Q3 16 were $44 million compared with experience losses of $42 million in1H 16, reflecting:

retail income protection experience losses of $18 million

retail lump sum experience losses of $8 million

group insurance claims experience losses of $12 million, and

lapse experience losses of $6 million.

Q3 16 experience reflected ongoing challenges in the market environment, seasonality of lapsesand lower than expected Group Salary Continuance and income protection terminations.

2H 16 wealth protection experience guidance/

AMP’s Australian wealth protection business continues to operate in a difficult market environment.As a result, if year to date trends continue into Q4 16, in addition to the impacts of potential bestestimate assumption changes, experience losses for the Australian wealth protection business in2H 16 are likely to be in the order of $75 million. However, experience by its nature will be volatile from period to period.

FY 17 wealth protection guidance

FY 17 profit margins for the Australian wealth protection business are expected to be impacted bya combination of strengthened assumptions ($65 million) and execution of the reinsuranceagreement ($25 million). As a result, profit margins in FY 17 are expected to reduce byapproximately $90 million.

Q3 16 Cashflows and AUM update

Australian wealth management net cash outflows were $327 million for the quarter, down from net cashflows of $241 million in Q3 15, driven by the uncertainty in superannuation legislation,advisers adjusting to an enhanced regulatory environment and recent investment market volatility driving weaker inflows in retail products. AMP is optimistic that recent government announcements will reverse the trend in superannuation contributions.

Internal inflows were $4.4 billion in Q3 16 ($4.3 billion in Q3 15) representing 61 per cent(57 per cent in Q3 15) of total cash inflows.

Total AUM was $118.1 billion, up 3 per cent from $115.0 billion at the end of Q2 16 (up 6 per centfrom $111.1 billion at Q3 15). The increase since June 30 reflected positive investment market movements during the quarter. Average AUM increased by 3 per cent to $117.8 billion from Q3 15

AMP’s leading wrap platform North reported net cashflows of $1.1 billion in Q3 16, up 2 per centfrom Q3 15. 49 per cent of North’s net cashflows were externally sourced. North AUM grew to$25.2 billion at the end of the quarter, up 8 per cent from $23.4 billion at the end of Q2 16 and increased by 32 per cent from $19.1 billion at Q3 15.

AMP Flexible Super reported net cash outflows of $83 million in Q3 16, down from net cashflows of$274 million in Q3 15, driven by increasing preference for North by new and existing pension customers and the weaker industry environment. Flexible Super AUM increased by 2 per cent inQ3 16 to $15.7 billion and increased 8 per cent from $14.4 billion at Q3 15.

Corporate superannuation reported net cash outflows of $69 million in Q3 16 down $96 million from Q3 15. The prior period benefited from member transitions from a large mandate win which did not repeat in Q3 16.

External platform net cash outflows were $454 million in Q3 16 compared to net cash outflows of$493 million in Q3 15. This improvement in net outflows was largely the result of lower net cashout flows from advisers who left Genesys offset by lower platform inflows as advisers continue touse North as the preferred platform.

SuperConcepts now supports 54,910 administration and software funds representing 9.5 per centof the market. Growth of 40 per cent in the quarter was driven by the acquisition of additional SMSF software clients as part of the strategic partnership with accounting software provider Reckon, announced in August. Administration funds in the quarter fell 336 to 16,440.Total reported assets under administration grew by $3.9 billion in the quarter to $22.2 billion primarily from a strategic collaboration with a big four accountancy firm.

AMP Capital net cash outflows for Q3 16 were $208 million, comprising external cash inflows of$498 million for the quarter and internal net cash outflows of $706 million.

External flows benefited from strong flows into the China Life AMP Asset Management Company(CLAMP) offset by redemptions from the China Growth Fund and the loss of a $500 million lowmargin passive equities mandate. Overall, external net cashflow performance continues to reflecta shift from lower to higher margin asset classes.

AMP’s share of the CLAMP alliance delivered strong flows of $786 million in the third quarter.This partially reflects timing impacts around money market fund flows, as well as new fundlaunches during the quarter.

AMP Capital AUM at the end of Q3 16 was $162.5 billion, up 1 per cent from $160.4 billion at theend of Q2 16 (and $157.5 billion at Q3 15). Average AUM increased 2 per cent over the quarter to$163.2 billion.

AMP Bank’s loan book increased 3 per cent to $16.6 billion at the end of Q3 16 from $16.0 billion at Q2 16. The deposit book increased $1,116 million (10 per cent) in Q3 16 relative to Q2 16.

AMP New Zealand financial services’ net cashflows of $122 million were $63 million lower than in Q3 15 reflecting lower KiwiSaver flows and a reduction in one off transfers of clients onto NZ financial services platforms. New superannuation cashflow mandates are expected in Q4 16following other providers opting not to enter the updated regulatory regime required by the Financial Markets Conduct Act.

Australian mature

Australian wealth protection annual premium in-force (API) increased 3 per cent in Q3 16 to$1,984 million compared to $1,927 million in Q2 16. The increase in API was primarily driven by a4.6 per cent increase in individual lump sum.

Dividend and capital update

The AMP Limited board will decide on the final 2016 dividend in February 2017, based on the conditions at that time.

Due to the one off and largely non-cash nature of the changes announced today, the Board intends to exclude these impacts on current profits when determining the final 2016 dividend. It will also consider AMP’s enhanced capital strength and future earnings sustainability.

AMP’s policy remains to pay dividends on a payout ratio of 70-90 per cent of underlying profits.

The impact of anticipated best estimate assumption changes will absorb approximately$270 million of regulatory capital. This will be covered from within existing capital surplus and thecapital release expected from the Part 9 life company consolidation which will be in the order of$100 million.

AMP maintains a strong balance sheet and is well capitalised. The proceeds from the reinsurance agreement are anticipated to increase the existing surplus to AMP’s minimum regulatory requirements, which at 30 June 2016 was $1.9 billion. Consequently AMP will consider a range of capital management alternatives including a return of surplus capital to shareholders.

ANZ advises of additional FY16 Specified Charges

ANZ will announce its 2016 Full Year financial results on 3 November 2016. In advance of that announcement, the Group advises it will be recording additional specified charges in relation to the following items.
Derivative Credit Valuation Adjustment (CVA) – Institutional Markets Business.

ANZ has enhanced the methodology for the calculation of CVA, a valuation adjustment made to determine the fair value of derivative instruments. The refined methodology makes greater use of market credit information and more sophisticated exposure modelling and is aligned with leading market practice. A $168 million1 charge (net of tax) will be recorded as a reduction to Institutional Markets revenue and will appear in the Specified Items table for comparative purposes. Of this, $25m relates to movements in CVA in the 2016 financial year with the remainder related to a once off adjustment for prior periods to mark to market the current derivative portfolio.

Restructuring Charge

ANZ will be recording a further $100 million (net of tax) in restructuring charges to support the evolution of the Group’s strategy, underpinning further productivity through reshaping the workforce, reducing complexity and duplication. The Group will outline the use of this charge in more detail in the FY16 results materials, and it will appear in the Specified Items table as per the restructuring charge taken in the First Half.

Total Second Half Specified Items Charges

Total Specified Items in the Second Half will be $360m (net of tax). In addition to the items outlined above this includes the second half impact of changes in the application of the Group’s software capitalisation policy and pro forma adjustments for the Esanda Dealer Finance divestment announced in ANZ Interim Results.

Tables were provided in the Consolidated Financial Report and Dividend Announcement at the First Half Result to identify the impact of Specified Items on Cash Profit in order to allow comparison with prior periods. A template in the same format, updated to include the Second Half Specified Items is included with this News Release to assist the market with its preparations ahead of the FY16 results release.

NAB FY16 Lifts Cash Earnings … But

NAB has released their FY16 results. Given the transactions in the year (the effect of the operations and loss on sale for both CYBG and 80% of NAB Wealth’s life insurance business), we have to read these results carefully.

Cash earnings were $6.48 billion, an increase of $261 million or 4.2%, and above expectations. They were helped by lower tax on foreign businesses, as well as provisioning adjustments and trading related income. CET1 ratio at 9.8% was higher than expected.

However, the group net interest margin fell 2 basis point, thanks to higher funding and treasury costs.

The cash ROE was 14.3%, down 50 basis points.

On a statutory basis, net profit attributable to the owners of the Company was $352 million, down 94.4% reflecting the loss on sale for both CYBG and 80% of NAB Wealth’s life insurance business. Excluding discontinued operations, statutory net profit decreased 5.6% to $6.42 billion.

On a cash earnings basis, Revenue increased 2.5%. Excluding gains in the March 2015 half year from a legal settlement and the UK Commercial Real Estate loan portfolio sale and SGA asset sales, revenue rose approximately 3.7%, benefitting from higher lending balances and stronger Markets and Treasury income. Group net interest margin (NIM) declined 2 basis points mainly due to higher funding costs.

Expenses rose 2.2%. Key drivers include higher personnel costs and increased technology related amortisation and project spend, partly offset by productivity savings. Expenses in the September 2016 half year were tightly managed, declining 1.9% compared to the March 2016 half year.

The charge for Bad and Doubtful Debts (B&DDs) rose 7.0% to $800 million. The increase primarily reflects higher specific charges relating to the impairment of a small number of large single name exposures in Australian Banking.

The ratio of Group 90+ days past due and gross impaired assets to gross loans and acceptances of 0.85% at 30 September 2016 was 7 basis points higher compared to 31 March 2016 mainly reflecting increased impairment of New Zealand dairy exposures of which the majority are currently classified as no loss based on collective provisions and security held.

The Group’s Common Equity Tier 1 (CET1) ratio was 9.8% as at 30 September 2016, an increase of 8 basis points from 31 March 2016 reflecting the sale of 80% of NAB Wealth’s life insurance business and strong capital generation, largely offset by the impact of higher mortgage risk weights from 1 July 2016. The Group’s CET1 target ratio remains between 8.75% – 9.25%, based on current regulatory requirements.

The final dividend is 99 cents per share fully franked, unchanged from the 2016 interim and 2015 final dividends.

The Group maintains a diversified funding profile and has raised $36.4 billion of term wholesale funding in the 2016 financial year. The weighted average term to maturity of the funds raised by the Group over the 2016 financial year was 5.4 years.

The stable funding index was 91% at 30 September 2016, 2 percentage points higher than at 31 March 2016.

The Group’s quarterly average liquidity coverage ratio as at 30 September 2016 was 121%.

Looking at the segmentals:

Australian Banking cash earnings were $5,472 million, an increase of 7% reflecting higher revenue and lower B&DD charges. Revenue rose 5% benefitting from stronger Markets and Treasury performance, combined with higher volumes of housing and business lending and a 3 basis point lift in NIM, year on year. Home lending in Australia grew above system in recent months, having been below the market earlier in the year.

Housing NIM declined in the second half, though this includes the impact of cost of funds methodology changes between Housing Lending and Deposits products, resulting in a 4bps NIM decline in the Sep 16 half year. However they also said, post the August cash rate cut, margins in the mortgage book have improved, around 15 basis points.

Personal Banking NIM includes the impact of this cost of funds methodology changes between Housing Lending and Deposits products, resulting in a 2bps NIM decline in the Sep 16 half year.

Looking in more detail at their mortgage book, 31.9% of home loans are interest only. The average portfolio LVR is 45.1% on a dynamic basis. 34.4% of loans are via brokers, and 42.3% of loans are for investment purposes.

Past 90 day home loan delinquency shows a rise in WA, but only a small lift across the portfolio to 0.52%. Loss rate is 0.03%, up slightly from March 2016.

62.3% of home loan borrowers are paid ahead, and the average number of months ahead is 15.

NAB has 4,299 brokers under their owned aggregators.

They also source mortgages via their aligned advisor network.

Revenue for Business Banking increased 2% and for Personal Banking increased 7%. Expenses rose 4% due mainly to personnel cost increases, but over the September 2016 half year decreased 1%. B&DD charges of $639 million fell 4% reflecting improved credit quality in the broader business lending portfolio partly offset by higher specific charges arising from a small number of large single name impairments.

NZ Banking local currency cash earnings of NZ$836 million rose 2% over the year. The key drivers were improved revenue and lower B&DD charges reflecting favourable economic conditions outside the dairy sector. Revenue rose 1% with improved lending volumes and fee income, partly offset by a decline in NIM due to competitive pressure and higher funding costs. Expense growth was contained to 1% despite continued investment in the Auckland focused growth strategy.

NAB Wealth cash earnings increased 13% to $356 million reflecting stronger revenue and lower expenses. Net income rose 2% benefitting from higher average funds under management (FUM), up 12% given strong investment markets, positive net funds flow and the inclusion of JBWere FUM from January 2016. Expenses declined 4% reflecting lower regulatory and compliance spend combined with tight control of discretionary costs.

Residential Deposits Reaches Record – Stockland

The property developer Stockland updated security holders on its progress over the past year and its plans for the year ahead and released its first quarter FY17 market update, announcing a strong start to the year, including a record number of deposits for its Residential business. They see constructive signs for an elongated property cycle.

Stockland achieved 2,301 net deposits on residential lots, townhouses and completed homes in the quarter, up from 1,557 for the corresponding period in FY16. Chief executive Mark Steinert said projects in Sydney, Melbourne and south east Queensland made “significant contributions” to the growth in deposits, while Perth has shown signs of stabilisation.

As forecast in its FY17 outlook in August, around two thirds of Stockland’s Residential profit will fall into the second half.

Net deposits on residential lots, townhouses and completed homes jumped 47.7 per cent to 2,301 in the three months to September 30, from 1,557 in the same period a year ago. Andrew Whitson, CEO Residential, said: “We see continued high demand in the Sydney and Melbourne markets and an encouraging return of first home buyers in south east Queensland, who are taking advantage of the Queensland First Home Owners’ Grant, which was recently increased to $20,000.

“We remain on track to achieve more than 6,000 residential settlements for the full year and see constructive signs for an elongated property cycle.”

Stockland’s Retail business, the single biggest contributor to group earnings, saw a slight moderation in the rate of sales growth. Total sales for the quarter increased by 2.4 per cent, with comparable specialty sales up 1.1 per cent on the corresponding quarter last year. Importantly, sales data from approximately one-third of the portfolio is excluded, due to the redevelopment of some of its most productive centres, most notably Stockland Wetherill Park in western Sydney and Stockland Green Hills in the lower Hunter Valley. Comparable specialty sales per square metre grew 3.0 per cent for the quarter to $9114 per square metre.

Stockland reported that the strongest retail categories were communications technology; food catering and casual dining; and retail services.

John Schroder, CEO Commercial Property at Stockland, said: “The first quarter saw the short term impact of redevelopment activity and retail remixing within our centres, which will deliver future earnings growth. We expect retail sales growth to continue at moderate levels, and we remain confident of achieving 3 – 4 per cent comparable retail FFO growth in FY17, in line with our guidance.”

Stockland maintained good leasing momentum within its Logistics and Business Parks business, with leases executed on 62,400 square metres of floor space and Heads of Agreements signed on a further 92,500 square metres. Weighted Average Lease Expiry (WALE) remained steady at 4.5 years.

“We’ve maintained our disciplined approach to capital recycling and we are using our capabilities to upgrade and reposition our portfolio,” explained Mr Schroder. “We have made good progress on our $400 million development pipeline, which is strongly weighted towards the higher-performing Sydney and Melbourne markets.”

In Retirement Living, Stockland achieved 255 net reservations during 1Q17. The first quarter result was well supported by Stockland’s development pipeline with 96 net reservations of new homes, including from its development projects at Cardinal Freeman The Residences at Ashfield in Sydney’s inner west and Willowdale Retirement Village in south west Sydney. Stockland recorded 159 net reservations within its established portfolio, with the figure constrained by a comparatively lower turnover of homes in New South Wales and Queensland.

Stockland confirmed that it is on track to achieve target growth in Funds from Operations (FFO) per security of 5.0 – 7.0 per cent across the entire group, with a profit skew to 2H17, assuming no material change in market conditions.

Stockland continues to target an estimated distribution per security of 25.5 cents, assuming no material change in market conditions.