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ANZ reports 18pc fall in profit

Nicholas Grove  |  03 Nov 2016Text size  Decrease  Increase  |  

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ANZ delivers an underlying profit in line with Morningstar's forecast as part of a "messy" batch of results, while looking to offload its Australian wealth operations following a strategic review.

 

Australian and New Zealand Banking Group (ASX: ANZ) on Thursday announced an 18 per cent fall in fiscal 2016 cash profit--a preferred measure of underlying performance among the big Australian banks--to $5.9 billion, following a "reshaping" of the business.

Earnings per share on a cash profit basis fell from 260.3 cents in fiscal 2015 to 202.6 cents.

Statutory profit after tax for the year ended 30 September 2016 stood at $5.7 billion, down 24 per cent.

Net interest margin--the difference between interest income generated by the bank and the amount of interest paid out to lenders, relative to the amount of its assets--fell from 2.04 per cent to 2 per cent.

In a statement to the ASX, the bank said the result included just over $1 billion of after-tax write-downs, primarily related to reshaping the group to "position it for improved performance in future years".

Almost half of this figure related to a change in the application of ANZ's software capitalisation policy.

Adjusted pro-forma cash profit--which strips out several one-off "specified items," including the impact of the software capitalisation policy changes--stood at $7.0 billion, down 3 per cent and in line with Morningstar's forecast.

Morningstar head of Australian banking research, David Ellis, argues that the adjusted pro-forma cash profit figure is a better reflection of underlying performance and a more useful benchmark for assessing future performance.

Ellis also said while the 80 per cent rise in bad debts to $1.9 billion was well flagged and in line with expectations, it was still "disappointingly high" and reflected the higher-risk lending the bank had undertaken over the past several years.

In line with guidance, ANZ declared a final dividend of 80 cents a share, which brought the total dividend for fiscal 2016 to 160 cents a share fully franked, down 12 per cent. The full-year payment was also in line with Morningstar's forecast.

The final dividend will be paid on 16 December 2016 to shareholders on record as of 15 November 2016.

ANZ also announced that it intended to exit the manufacture of life insurance and wealth product.

"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 bank said.

"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."

Morningstar's Ellis said the update on ANZ's wealth business was to be expected.

"ANZ has struggled over the past several years to establish a strong wealth presence and has been overshadowed by its major bank peers," he said.

Last week, the bank backtracked on part of its Asian growth strategy when it announced the sale of five retail and wealth businesses to Singapore-based DBS Bank Limited. ANZ said will book a net loss on the sale of $265 million in fiscal 2017.

While not providing any specific earnings guidance, ANZ chief executive officer Shayne Elliott said the bank has a clear strategy for the simplification of its business and for the actively rebalancing of its portfolio.

"Importantly, we have the organisation aligned and we have established momentum in relation to the work that still needs to be done," he said.

"This sets us up well to increase the pace of execution in 2017 and to deliver a better bank for customers and for shareholders."

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Nicholas Grove is a Morningstar journalist.

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