Investors cheer as Shayne Elliott battens down ANZ hatches

Shayne Elliott’s ANZ has become the first major bank since the global financial crisis to slice its dividend.

ANZ CEO Shayne Elliott in Melbourne yesterday. Picture: David Geraghty

ANZ chief Shayne Elliott has stamped his authority with a painful rebasing to ensure the bank is match fit for the “changed world”, shrinking unprofitable assets and becoming the first major bank since the global financial crisis to slice its dividend.

Winning support from investors, ANZ unveiled measures that slashed earnings by $717 million to ensure a “stronger and sustainable future”, including tightening up technology expensing policies, restructuring charges and writing down the value of its holding in Malaysia’s AmBank.

The actions — plus almost $1 billion in bad debt charges — dragged down cash profit for the six months to March 31 by 24 per cent to $2.8bn, well below expectations, as return on equity slid below 10 per cent.

After Westpac held its dividend steady following higher bad debts, ANZ took the more drastic step of cutting the interim payout to 80c fully franked, from 86c a year ago, and flagged a new payout ratio of 60-65 per cent of annual cash profit, from 65-70 per cent.

ANZ shares initially dived 5 per cent, before clawing back and ending 5.6 per cent higher at $25.05 in a wild ride that led to gains for Westpac, National Australia Bank and Commonwealth Bank.

Mr Elliott, the bank’s former institutional boss and chief financial officer who oversaw much of the growth in his former division and Asia, conceded the profit result was “poor” and denied he was “distancing” himself from the past.

“This is about a recognition that the world in which we operate has changed,” he said, noting stronger competition, tighter regulation and weaker economies.
“I absolutely accept we made some mistakes in the past. We over­extended, we overbuilt. Fine. But today is about action and taking hard decisions to move forward.”

The capital deployed to the higher-returning Australian and New Zealand retail and commercial banking operations will rise to 60 per cent in coming years, while the less profitable institutional division is starved to 40 per cent of shareholder funds, down from more than half.

After reducing credit risk-weighted assets by $16bn during the half, Mr Elliott said the run-down across the institutional book, particularly in Asia, would continue for the next 12-18 months “until we’ve set it on a more sustainable footing”.

He also stuck to the bank’s target of increasing returns from institutional banking in Asia to 13 per cent, noting it was undertaking a “ruthless” look at the book “customer by customer”.

He said while cutting the dividend was a difficult decision and the bank could have maintained it, running a bank “on the edge all the time” could lead to “poor decisions just to keep a dividend or payout ratio”.

“We want to know when we turn up on a Monday morning, that unless somebody does something really stupid, the bank will continue to grow and generate capital and pay out a responsible dividend that’s competitive for our shareholders,” he said.

Mr Elliott stressed that once the payout ratio fell to 60-65 per cent, he would aim to increase this over time and the second-half dividend would probably continue to be higher than the interim payout.

“ANZ is making the right decisions, addressing many of the market’s concerns,” said UBS analyst Jonathan Mott, who backed the cut to the dividend and called the result “the rebase we’ve been waiting for”.

But he cautioned: “As has been seen numerous times in bank restructurings since the crisis these processes are never easy and invariably lead to additional earnings volatility.”

The rebasing includes a $441m hit from a revision to the software capitalisation policy, raising the threshold for investments so more are directly paid for — a strategy that increases expenses but ­reduces the amortisation charges in the future.

The bank also wrote down its $1.4bn stake in Malaysia’s scandal-plagued AmBank by $260m and took $101m of restructuring expenses, including “pretty meaningful” job cuts.

In contrast, favourable gains of $29m and $56m, respectively, were recognised from ANZ’s stake in Bank of Tianjin and the sale of the Esanda dealer finance portfolio to Macquarie.

All will be taken “above the line”, included in cash earnings that feed into executive pay.

Omkar Joshi, an analyst at Watermark Funds Management, welcomed the accelerated amortisation of capitalised software and ANZ’s capital generation, noting it was driven by the reduction in institutional exposures that led to a $2bn drop in overall lending — the bank’s first reduction since 2010.

The bank’s intent on cutting costs led to 2347 jobs being shed in the past year to 48,896, adding to the 1882 jobs lost at Westpac. While unlikely to cut staff at the same rate, Mr Elliott flagged that the rise of internet banking and the shrinking of the institutional bank would see job numbers fall.

After the bad debt charge spiked to $918m following higher provisions for a “small number” of resources-related exposures, ANZ said the overall credit environment remained “broadly stable” aside from “pockets of weakness” due to lower commodity prices.

Unlike Westpac, which flagged lower bad debts in the second half, Mr Elliott said ANZ didn’t give guidance because the economy was “prone to accidents and surprises” amid a tricky transition. He added ANZ would be “tightening up” and being “more cautious” about lending to the miners and related industries, but would not exit the space.