ANZ Bank’s home loans turnaround still a work in progress, profit margin hit

Tough competition for new mortgages, leading to worse-than-expected margins, pushed shares in ANZ down by more than 5 per cent before a late recovery.

ANZ said it continued to have the flexibility to return surplus capital to shareholders, after buying back $1.02bn of shares in the first quarter. Picture: David Geraghty/NCA NewsWire

Tough competition for new mortgages, leading to worse-than-expected margins, pushed shares in ANZ down by more than 5 per cent on Monday – although a late recovery saw them end 1.6 per cent lower at $26.65.

While the bank did not announce a quarterly profit figure, the market took fright at the 8 basis-point contraction in the net interest margin to 1.57 per cent, mostly driven by strong competition and the lower exit margin in 2021 compared to the average of the second half.

ANZ said in an statement to the stock exchange that the margin outlook had improved, with the impact of rising interest rates, mainly in New Zealand, and recent changes in deposit pricing.

Goldman Sachs analyst Andrew Lyons said pressures in the net interest margin were likely to ease in the second quarter.

“But the underlying NIM was down 5 basis points in the first quarter, which is already more than the 3 basis points we forecast in the full half,” he said.

ANZ’s efforts to turn around its troubled home loan business remain a work in progress.

Plagued by slow processing times, the bank forecast late last year that it would report some expansion in its mortgage portfolio in the first half before matching the growth of its major bank rivals in the second half.

The portfolio grew “slightly” in the first quarter of the new financial year, with application times for “simple” loans now in line with other major lenders after an improvement in systems.

Work was continuing to improve response times for more complex applications.

“Given the high levels of refinancing activity in the sector, managing both attrition and margins remain key areas of focus,” the ANZ statement read. The bank said revenue in the markets business was softer in October.

While subsequent months were more in line with revenue trends in 2021, the weaker start in October would impact the bank’s first-half performance.

On its cost reduction program, where ANZ aims to slash annual running expenses to $8bn, the bank said it expected flat costs in the first half as it invested in the business at a faster rate.

Investment would also be expensed – instead of capitalised – at a higher rate than in 2021.

Mr Lyons said the run-rate on full-year costs, which are expected to be slightly higher in the 2022 financial year, had not changed.

However, the expected reduction in annual “run-the-bank” costs was now likely to be biased to the second half.

ANZ said that revenue, in particular other operating income, would take a $140m hit spread evenly over the next two halves from an initiative to provide customers in the Australian retail and commercial operations with simpler and lower fee options.

Meanwhile, the credit environment remained benign, with a total provision release of $44m in the quarter. This comprised a collective provision release of $122m and an individually assessed provision of $78m.

The group had a common equity tier one ratio of 11.65 per cent at the end of the quarter.

Mr Lyons said this was about 30-40 basis points less than expected, which was most likely due to lower cash earnings in the first quarter and elevated balance sheet growth in the institutional business.

After announcing a $1.5bn on-market buyback in July, ANZ said it continued to have the flexibility to return surplus capital to shareholders, after buying back $1.02bn of shares in the first quarter. The board was currently weighing up an increase in the size of the buyback.

Any decision would balance the importance of capital efficiency with maintaining an appropriately strong balance sheet and continued monitoring of the economic situation.