ANZ’s share price gain baffles markets


But the mysterious share price response conveyed the impression that investors took the view the worst was over for banks.

This may be so with regard to the compensation, remediation and provisioning costs related to fixing up the very expensive mistakes dealt with by the banking royal commission.

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But ANZ boss Shayne Elliott was not saying the current banking market in Australia was showing any signs of recovery, indeed he said the challenging conditions were continuing in the second half.

“The tough retail banking environment will be a reality for the foreseeable future with subdued credit growth, intense competition and increased compliance costs impacting earnings,” was Elliott’s sombre assessment.

So I asked one of ANZ’s competitor banks why the share prices bolted up in unison. The consensus? Its team was “baffled”.

And the response to the same question I asked one of the top banking analysts was much the same. He added that his major institutional clients were all scratching their heads..

Maybe it was a bit of short-covering, one ventured, or maybe it was a response to quantitative buying – that is, done by computer programs not a person making a buying decision.

I wondered whether investors were extrapolating from ANZ’s decision to hold dividends steady that other banks would do the same. I was told firmly that no one predicted a dividend cut from ANZ so that theory was shot down – even before it became more than a “thought-bubble”.

Given the make-up of ANZ’s earnings, the more logical response from the sharemarket would have been to sell off its competitors.

ANZ’s cash profits, which came in 2 per cent ahead of the previous corresponding period, were saved by a few factors – and they are things that are mainly individual to it.

Firstly, it has a proportionately far bigger exposure to its institutional banking segment – thus is less reliant on earnings from its Australian retail business.

The institutional business had a pretty strong result. Meanwhile, ANZ has a particularly large New Zealand operation which also performed well.

Lastly, Elliott and his team made a fair fist of getting costs down.

All these elements helped to offset the weakness of the Australian business which experienced a 4 per cent decline in revenue while profit before provisions slumped 8 per cent against the same half last year.

ANZ says 5 per cent of its home loans are now in negative equity.

The result from its Australian mortgage business – which lost market share- was compounded by ANZ’s decision to become more risk-averse and retreat from some parts of the market.

Elliott has confessed the pendulum may have gone too far and the bank is now attempting to regain some lost ground.

ANZ has also been ahead of the pack in improving its expense verification for borrowers. Laudable as this is, it didn’t have the appropriate systems in place to implement stricter lending criteria. This pushed approvals for lending applications from two to 20 days – something the bank is now working to fix.

The other differentiating (and positive) point about ANZ is its particularly robust capital position – thanks largely to numerous asset sales. This places the bank in a better position than its peers to deal with upcoming and more stringent regulatory changes to capital requirements in New Zealand. ANZ’s well-fortressed capital position is also the reason ANZ was a shoo-in to retain its dividend.

One aspect to ANZ’s results that we should see repeated when its peers report, is the maintenance of pretty comfortable credit quality in general.

However, we are starting to see some mortgage stress with numbers rising (albeit off a low base) for those who are 30 or 90 days past their due dates.

Elliott, who incidentally welcomes the prospect of a cut to the Reserve Bank’s cash rate, puts much of this down to a lack of wage growth and the difficulties borrowers have in trading down to less expensive properties.

And as for the fall in the value of house prices, Elliott seems pretty relaxed. But 5 per cent of ANZ’s loans are now in negative equity, which means the amount of the loan exceeds the value of the property.

There is no reason to believe this wouldn’t be the case industry-wide.

Elizabeth Knight comments on companies, markets and the economy.

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