Australia and New Zealand Banking Group expects regulations designed to cool Australia's overheating housing market to slow lending growth, heaping pressure on banks to cut costs, Chief Executive Shayne Elliott said on Tuesday. Australia's third-biggest lender reported a 23 percent rise in first-half cash profit to $3.41 billion ($2.57 billion) for the first six months to March 31, missing expectations and triggering a 3 percent fall in the share price, its biggest one-day decline in nearly six months.
The outlook for Australian banks, which are highly reliant on mortgage loans, has dimmed after the Australian Prudential Regulatory Authority (APRA) on March 31 asked them to limit new interest-only lending to 30 percent of total new residential mortgage lending, from 40 percent. Regulators are increasingly worried about a run-up in borrowing following years of investor-led house price growth in Sydney and Melbourne, at a time when household debt is already at record highs and wage growth is low.
Elliott said annual credit growth currently at about 6 percent, driven almost exclusively by housing loans, was not "desirable or sustainable" given wages were rising at just 2 percent. "It is clear that the regulator, with the gap between wage growth and credit growth, is looking for actions to bring those two closer together," he said. "Without clear indications of strong wage inflation, our risk appetite plus regulatory action will likely curtail medium-term credit growth to 5 percent and probably lower."
ANZ's first-half profit was 3 percent below market expectations, hit by a 2-percent drop in net interest income, analysts said. "There are a lot of lumpy items in this result. The key message was that underlying revenue was weak as the company strengthens its balance sheet," UBS analyst Jonathan Mott said.
ANZ's net interest margin fell to 2 percent from 2.06 percent at September 30 due to higher wholesale funding costs and deposit competition, but recent increases in mortgage rates could be positive for margins in the second half, Elliott said. Its first-half return on equity, typically lower than peers, rose to 11.8 percent, from 9.7 percent a year earlier, the first sizeable increase since 2010 as it cut costs and institutional lending to focus on the most profitable clients. Like other Australian banks, ANZ has pushed up mortgage rates in response to regulatory action and cut costs, with staff numbers falling by more than 2,800 over the last year.
ANZ was the first of three of Australia's Big Four banks to report results for the half-year ended March 31 over the next week. It was expected to report the highest earnings growth of the group because it is in a major turnaround phase with bad debts falling and assets being sold. ANZ kept its interim dividend steady at A$0.80 per share. Its Tier 1 capital ratio was at 10.1 percent as of March 31.