While investors were disappointed with ANZ’s cost performance, Mr Elliott said the result demonstrated the bank’s ability to manage the costs of running the bank well, “which are flat again, despite inflationary pressures”.
Milford Asset Management portfolio manager Will Curtayne said it would be difficult for all the banks to achieve growth as interest rates rise and mortgage growth shifts from high-single to low-single digits.
“There’s a bit of growth for ANZ in the institutional business, but the reality is top line growth for all the banks will be challenged,” Mr Curtayne said.
He said the comments of Mr Elliott and ANZ’s relatively new chief financial officer, Farhan Faruqui, set a much more cautious tone, warning investors not to expect too much of a bounce in margins from higher interest rates.
“The bull case for banks is hopefully some net interest margin expansion as rates go up and credit growth slows, but the CFO basically watered down the benefits of NIM, saying before we get a benefit we’re going to see higher costs and more provisions on our mortgage book,” Mr Curtayne said.
Home loan processing
ANZ said it expects to earn another $800 million from increases in the cash rate over the next 12 months, but Mr Faruqui said any windfall would be dependent on external factors including competition.
Although ANZ stressed it has now added 30 per cent more capacity to process home loans as fast as its peers and meet demand, Mr Elliott said the bank would not chase market share in the highly competitive world of mortgages at the expense of returns to shareholders.
“Once you have the capacity, there’s still a question of should we use it,” Mr Elliott said.
Retail and commercial banking grew by 11 per cent compared with the same period of 2021, to $1.986 billion.
Mr Elliott admitted ANZ’s retail banking performance had been disappointing but stressed the business had kept a disciplined approach to risk that would stand the bank in good stead from a provisioning perspective.
“We had hoped to achieve more by now, particularly in Australian retail and commercial, but we are catching up fast,” he said.
“I’m pleased with our approach to risk, even when it has come at a cost to short-term earnings growth.”
Mr Elliott said he would prefer to allocate capital to expand lending in the institutional business rather than write more mortgages in a highly competitive, shrinking market where margins are contracting, signalling a willingness to ditch the bank’s plan to return to the same level of growth as the other major banks.
“Where will we grow? I think the growth opportunities are much greater outside of home loans because in a rising interest rate environment, home loans are likely to grow slower,” he said.
“We do think there will be an expansion in business credit and we think we’re well-positioned to finance that.”
Strong lending momentum
Stripping out the impact of a disappointing balance sheet trading performance by its markets division, ANZ’s institutional business grew by 9 per cent. The headline number was down 23 per cent to $730 million.
“Our lending growth has been very strong in the institutional bank and we expect that to continue,” Mr Elliott said.
Mr Faruqui said there was strong lending momentum, directed towards more profitable customers across segments such as financial institutions, sustainability and food and agricultural supply chains. Selecting the right customers helped margins to rise by 5 basis points in the half, he said.
However, head of institutional Mark Whelan warned not to expect the same level of growth in the second half, given much of the demand for credit came from customers drawing on facilities because of geopolitical uncertainties tied to Russia’s invasion of Ukraine.
Mr Elliott said predicting how much underlying demand was driving inflation versus how much was a result of supply chain shocks would remain a big challenge.
“I think [predicting where inflation is coming from] is part of the complexity and that’s why people are struggling with it a bit,” he said. “Instead of having this gentle rise in inflation, we’ve gone from zero to 6 per cent really fast.”
The result is that many businesses are still unable to pass on those costs to their customers, Mr Elliott said, meaning banks would have to stay close to their customers and carefully wait and watch to see how things transpire.
While ANZ has not taken into account the impact of rising inflation on the increasing cost of living on customers’ ability to repay loans, including mortgages, Mr Elliott said the bank was confident other buffers, including around assessing income, were robust enough to guard against a big rise in bad loans.
“We’re starting in an amazingly benign period,” he said. “Doubtful debts have never been lower. There are less people with a home loan who are in trouble.”
ANZ increased its interim dividend to 72¢, fully franked, from 70¢ in the previous comparable period, and it was flat compared with the final dividend of 2021.
Citigroup analyst Brendan Sproules said the result beat consensus, but was entirely driven by the writing back of provisions after the COVID-19 pandemic.
He said the underlying result was 4 per cent to 5 per cent weaker than expected, but rising rates would provide a boost in the second half.
“The weak core profit result is likely to concern investors today,” Mr Sproules said. “However, the second half is expected to improve as rising rates starting to grow NIMs.
“A rising rate environment is also expected to assist a recovery in market revenue, which recorded a decade-low in this result.”