By Andrew Main

Shareholders in ANZ Bank yesterday enjoyed the satisfaction of seeing the group’s half-yearly result produce an unchanged 80c a share fully-franked interim dividend, while building a bigger buffer than previous between what it earns and what it pays out.

Earnings per share rose 22% on a cash basis from 96 cents to $1.17.

Kiwi CEO Shayne Elliott, appointed early last year, was able to announce a 23% rise in cash profit to $3.41 billion, although analysts had been hoping to see a figure closer to $3.45 or even $3.5 billion.

The statutory reported profit was up 6% from $2.73 billion to $2.91 billion.

The market gave its traditional Bronx cheer welcome to any result coming in under expectation, even slightly, by marking the shares down 97 cents on the open to $31.98.

The shares recovered but still closed down 70 cents, or 2.12%, at $32.25.

Considering some analysts had been hoping to see the shares move up through the $33 mark, it was a thin performance and what’s more, the other banks felt the draught. NAB and Westpac will be reporting in the coming days and where one bank goes, so generally do the others, so all the banks were marked down.

Back in November, the bank reported a drop in cash profit for the 2015-6 year of $5.9 billion, down 18%.

The outlook statement from the bank yesterday was hardly a ringing endorsement for current conditions, noting that “the environment for banking remains constrained, with intense competition and pressure on margins, subdued lending growth, rapidly changing customer expectations and increasing regulation.”

Don’t all rush, then, even though the bank has limited bad debts to a loss rate of 25 basis points, which is 11 points below the level at the end of the last financial year in September 2016. 

CFO, Michelle Jablko, spoke a worthwhile truth by noting that if a bank wants to build up its capital base, as they all do thanks to Basel III, it’s going to see its margins squeezed and that’s exactly what happened. 

Specifically, ANZ was able to claim that its common equity tier one ratio had risen from 9.8 to 10.1% in comparison with the half to March 31 last year, a double figure triumph that will get quite a lot of air time. Mr Elliott said this was the first time the key indicator had been above 10%. 

Meanwhile, the Net Interest Margin, the gap between what the bank pays out and what it earns, was squeezed down from 2.07% to 2%. While that looks initially like an unworrying 7 basis points, it can also be portrayed as a drop of 3%.

That is an underlying point to remember. While critics always seem to bleat about banks making “obscene” profits, they don’t look to see that the amount of money the banks make for their shareholders is actually a tiny fraction of the amount of money they move in and out. In ANZ’s case, it reported $580 billion in gross loans out, up from $566 billion, while customer deposits were up from $447 billion to $468 billion.

Intercepting less than $3.5 billion in cash profit in the latest half, as the bank has done, suddenly doesn’t look that exciting.

Overall, there’s an atmosphere of caution and discreet retreat from higher-risk areas, moving where possible out of Credit Risk Weighted Assets. The Bank cut by $8 billion the sale of its institutional assets, while at the same time, beefing up retail and commercial, i.e. smaller scale CRWAs by $2 billion. The fewer CRWAs a bank has, the higher a capital adequacy ratio it can claim.

ANZ is clearly nervous on some commodity lending, for well-publicised reasons.

Back in December, Mr Elliott made it clear ANZ would not be financing the controversial Carmichael coal mine in Queensland, to far less flak than Westpac just walked into. Maybe he was just a bit more subtle about it.

And let’s not forget that it’s been retreating from previous CEO Mike Smith’s favourite stamping ground, Asia. In October, it announced it would sell its retail and wealth business in five Asian countries, over 2017 and early 2018, to Singapore’s DBS Bank.

ANZ didn’t make much yesterday of the fact that that they’d booked a $265 million net loss on the deal but again, no one’s complaining too loudly in a world where corporates are in retreat from anything that smacks of risk.

With margins under pressure, asset sales do wonders for capital ratios.  For instance, the subsequent deal announced in January to sell a 20% stake in the Shanghai Rural Commercial Bank for $1.83 billion on its own lifted ANZ’s tier one capital ratio by 40 basis points from 9.6 to 10.0.

ANZ bought in originally in 2007 for $318 million but followed that up in 2010 with a further $250 million infusion in a rights issue.

The other statistic than bankers love is ROE, Return on Equity, and despite the increased hurdle created by the bigger amount of equity the bank has, ANZ yesterday reported it had risen by 130 basis points from 9.7% to 11.8%.

But it’s the very lack of ROE (not that the bank publishes that number) that is causing ANZ to put its Wealth business on the block for around $4 billion.

Like most bank bosses, Mr Elliott has spotted that, after a comfortable decade or so, wealth businesses are now much more circumscribed in the products they can sell thanks to the recent FoFA legislation, and it still costs a lot to keep the doors open and the clients properly advised.

As a consequence, the ROE they are producing is less than before, and in particular, less than the banks are used to earning from their bread and butter home lending business, which is a classic “set and forget” operation in terms of administration costs.

ANZ’s Wealth Australia earned net $123 million in the latest half, down from $157 million in the second half of last year and $176 million in the previous corresponding period.

ANZ is not alone among the banks in finding wealth a slightly declining industry, which causes a lot of experts to wonder who all the buyers are going to be, and at what price.

So, is ANZ a buy? It’s more of a dull but worthy core holding for yield-hungry investors, really. Current yield is a tad over 5% but that goes up handily for investors in pension mode. Of the eight brokers surveyed by FNArena, not one has a negative slant, although there are a few HOLDS.

And the 12-month target prices are in a very narrow band between $29 and $32, which suggests that there won’t be much to get excited about in the near term. To corrupt the old tailor’s advice, never mind the growth, feel the yield.