ANZ's vital signs a little weaker

ANZ chief executive Mike Smith painted a picture yesterday of a good result that was marred by exceptional credit provisions resulting from a limited number of institutional exposures. But most of the standard metrics were down.

When the bank reported its full year results last November, the most worrying item in the financial statement was the big increase in expenses in the September half, which outstripped revenue growth.  

Expenses were up eight per cent and operating income was up only three per cent in the six months to September. Smith said last year that he planned to make structural cost adjustment a priority.

There was only a small improvement to show yesterday. Cash operating expenses were up 12 per cent on the previous corresponding period, while operating income was up 13 per cent.

The cost to income ratio went up 10 basis points from 44.3 to 44.4. Smith said a lot of the increased spending was on investment in Asia, where earnings were growing strongly, but he conceded that the "strategic shift in cost management" he has spoken about previously was still a work in progress.

He said the bank would invest the proceeds of the sale of its Visa shares ($350 million before tax) in business process re-engineering. "We want to use more straight through processing. Some of our systems are archaic. We will make more use of our Bangalore facility."

Return on equity was 15.1 per cent, down from 19.6 per cent in the previous corresponding period. Return on assets was 0.78 per cent, down from 1.11per cent in the March half last year.

Cash earnings per share were down 16 per cent from 1.04 cents a share in March 2007 to 87.1 cents in the latest half.

The net interest margin was 1.99 per cent, down 25 basis points from 2.24 per cent in the previous corresponding period.

Chief financial officer Peter Marriott said factors affecting the margin included the higher cost of funds and a move by the bank to hold more liquid assets. Marriott said a lot of the growth in assets was low margin institutional business.

The provision for credit impairment was $980 million, a three-fold increase over the $327 million provision for the six months to September. Back in March last year the provision for credit impairment was a modest $240 million.

In a year the total provision charge as a percentage of average net advances has gone from 0.17 to 0.61 per cent. Net non-performing loans as a percentage of net advances has gone from 0.13 to 0.23 per cent over the same period.

The bulk of the provision came out of the institutional banking division. The division accounted for $698 of the $980 million provision, up from $76 million in the September half.

The provision was made up of $604 million of individual charges and $376 million of collective provisions.

The value of non-performing loans went up 64 per cent, from $640 million to $1.05 billion.