ANZ 1.36% $25.81 australia and new zealand banking group limited

anz's $1.1bn fails to impress the age

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    ANZ's $1.1bn fails to impress
    April 25 2003
    By Sharon Kemp

    ANZ chief executive John McFarlane says the bank's dividend payout ratio will move into the high 60 per cent range.

    ANZ Bank yesterday dressed up an uninspiring 9 per cent first-half net profit gain to $1.14 billion by forecasting it could keep earnings growing at near that rate this year and next.

    Chief executive John McFarlane also tempted investors with the promise of a dividend payout ratio that will climb into the high 60 per cent range "over the next few years".

    For the latest half the bank declared a 44¢ dividend return to shareholders, payable on July 1, which raised the payout ratio above 60 per cent of earnings.

    ANZ's pronouncements left the market unimpressed, with the bank's shares managing to scrape back to break-even for the day, finishing at $18.75 after trading for most of the day in negative territory.

    ANZ's March-half performance was helped by unexpected leaps in mortgage and small-business lending, which secured the bank 9 per cent growth in net interest income.

    Reflecting conservative times, the bank's deposits rose by $6 billion but failed to translate to growth in transaction fees.

    And faults in ANZ's loyalty point accrual methodology on co-branded credit cards cost the bank $38 million in profit. Additional amounts were lost through the higher cost of loyalty points and offering of low-fee transaction accounts designed to improve market share.

    That meant the credit cards business, until now a growing operation for ANZ, suffered a 41 per cent profit slide to $47 million in the first half as the bank booked a $27 million after-tax charge for payments to companies, such as Qantas Airways, which provide rewards to card users.

    "This cards issue has essentially put us back in the middle of the pack," Mr McFarlane said. "It's forced us to raise our game."

    The bank expects reform to credit card rules this year, driven by the Reserve Bank of Australia, will lop an additional $40 million off earnings in fiscal 2004.

    ANZ also fell short of what it had previously committed to spend on business development, which chief financial officer Peter Marriott said reflected the bank's caution about economic conditions.

    There were further signs of ANZ's caution.

    Mr Marriott forecast mortgage growth would become more subdued in the second half. The bank's board also failed to announce a share buyback yesterday, preferring instead to hold surplus capital as a buffer against further volatility.

    Analysts had been divided, leading up to yesterday's result, on whether ANZ would announce a buyback - but all had considered the measure an option.

    Mr McFarlane said that the bank was not postponing a buyback so it could preserve cash to undertake a large acquisition - such as Lloyds' National Bank of New Zealand, which is reportedly on the market.

    There is no further strong growth forecast for the driver of ANZ's interim profit - mortgages - nor can the bank expect an earnings boost from wealth management.

    The bank saw net profit contribution from the funds management joint venture ING Australia, of which it owns 49 per cent, slump 72 per cent to $7 million but will not write down the value of the division.

    Mr McFarlane said accounting firm Ernst & Young valued ANZ's share of the business at up to $1.8 billion, and it is valued in ANZ's books at $1.6 billion.

    Mr McFarlane said ANZ had deferred carrying the full value of the business on its books when it paid $2.2 billion for its share because the bank forecast volatile equity markets.

    The joint venture was realising promised cost savings, Mr McFarlane said, but the outlook was for fund inflows to remain subdued.

    The bank's mortgage growth, although unsustainable, bodes well for Westpac, National Australia Bank and St George Bank, which report interim earnings in the next two weeks.

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