Rising rates could lift ANZ revenues by $800m over year

Rising interest rates could lift ANZ revenues by $800m over the next 12 months and $2.3bn over three years.

ANZ chief executive Shayne Elliott: ‘(Interest rate hike) shouldn’t be the shock that many people will worry about’. Picture: Arsineh Houspian

Rising interest rates could lift ANZ revenues by $800m over the next 12 months and $2.3bn over three years, according to the company’s forecast – but the bank says it does not expect widespread financial pain for its customers from this week’s official cash rate increase.

ANZ chief executive Shayne Elliott said the Reserve Bank’s cash rate rise on Tuesday would hurt by taking money out of customers’ pockets, but the impact would be “relatively modest”.

“It shouldn’t be the shock that many people will worry about,” he said. “The amount of money people will have to spend on a house will moderate or go down, and house prices could potentially fall a little bit.”

Some 70 per cent of customers were ahead on their home loans, the bank said on Wednesday.

Opening the half-year reporting season, ANZ said net profit had increased 10 per cent to $3.53bn.

Rising interest rates would benefit its $142bn portfolio of capital and rates-insensitive deposits, of which $105bn was invested over three to five-year terms while the remainder would get a boost almost immediately.

The RBA lifted rates by 25 basis points – to 0.35 per cent – on Tuesday, the first official rise since November 2010. Economists expect increases in June, July and later in the year, with Commonwealth Bank forecasting rates could reach 1.6 per cent by February next year.

In October last year, the Australian Prudential Regulation Authority laid the groundwork for a turn in the rates cycle by requiring banks to lift their serviceability buffers from 2.5 per cent above the product rate to 3 per cent.

The regulator also wanted to take some heat out of the booming property market.

Mr Elliott said the most recent borrowers would have less flexibility, but it was those people experiencing a “double hit” such as losing their jobs or suffering a health issue who would be most affected. Bad and doubtful debts are currently at a record low.

Inevitably, the trend would rise, particularly in the business sector, but the impact was likely to be delayed for 18-24 months.

Mr Elliott also indicated that the bank would apply to APRA to establish a non-operating holding company, separating its banking and non-banking businesses subject to board, regulatory, investor and court approvals.

The purpose of the initiative – which would mimic Macquarie Group’s structure and cost in the tens of millions of dollars – was to create a growth option outside traditional banking and free up ANZ’s ancillary businesses from the regulatory burden faced by the banking operation. As a result, they would become more agile and responsive to customer trends.

Major bank share prices lifted on Wednesday, with ANZ firming 11.9c, or 0.4 per cent, to $27.38.

The group’s cash profit of $3.11bn, down 3 per cent on the September half-year, was about 4 per cent ahead of market expectations due to a large writeback in the collective provision, which resulted in a $284m benefit in bad and doubtful debts.

Core ANZ profit before provisions fell 4-5 per cent short of expectations and was “very weak”, according to Citi analyst Brendan Sproules, who blamed soft markets revenue and a sharp fall in banking-related fee income.

“The weak core profit result is likely to concern investors,” Mr Sproules said in a note.

“However, the second half is expected to improve as rising rates start to grow the net interest margin … A rising rate environment is also expected to assist a recovery in markets revenue, which recorded a decade low in this result.”

In the operations, ANZ said its troubled home loan business had benefited from investment in processing capacity, so that turnaround times were now comparable to competitors.

The bank remained on target to grow in line with its peers by the end of the current financial year, while keeping an eye on its margin performance.

This followed a six-basis-point decline in the net interest margin from 1.65 per cent in the prior half to 1.59 per cent, with the exit (net interest margin) at the end of March one basis point lower at 1.58 per cent.

The dividend was unchanged at 72c a share, consistent with the target dividend payout ratio of 60-65 per cent. The total provision was a net release of $284m, comprising a collective provision release of $371m and a specific provision of $87m.

Analysts at Moody’s Investor Services said the weak growth in the Australia mortgage market “continued to drag” on the bank’s revenue growth, but ANZ was “well positioned in face of a rising interest rate environment which should initially improve margins without compromising asset quality,” Frank Mirenzi said.

Mr Elliott said costs across the group remained tightly managed, with “run the bank” expenses coming in flat for the six months despite growing inflationary pressures.

“Productivity remains a key priority as we prioritise investments on increasing operational resilience and positioning the bank for new growth opportunities,” he said.

“These investments include the new retail banking platform in Australia, further developing our sustainable finance capabilities, building a new retail foreign exchange (and) rolling out Salesforce as a single customer service tool across the entire enterprise”.