ANZ suffered a 3 per cent fall in Australian home loan balances during the year to September, which is a reduction of around $7 billion. The bank says things are turning around.
For a bank going through a major simplification program that involves relying more on core businesses like home lending, these numbers are a worry for investors
The bank said lending volumes fell as a result of lower system growth, more intense competition, more conservative home loan origination risk settings and execution challenges.
Its Australian home lending share fell from 15.5 per cent to 14.3 per cent over the year. It is a loss of share that the bank will find hard to recover.
ANZ chief financial officer Michelle Jablko said the bank had “execution issues” that contributed to its poor performance in mortgage sales.
“We had better assessment times in the second half and the rate of decline slowed,” Jablko said.
With its back office sorted the back launched a home loan marketing campaign and saw a significant pickup in loan applications of around 30 per cent in the second half.
However, Jablko cautioned that the improvement would be offset by other factors. There has been a significant shift from interest-only lending to principal and interest, with a consequent increase in loan amortisation.
The proportion of borrowers paying interest-only has fallen from 31 per cent in 2016/17 to 15 per cent today.
In addition, there has been a substantial increase in loan prepayments. The proportion of borrowers ahead of their standard repayment schedule has increased from 71 per cent in 2016/17 to 76 per cent today.
The bank is holding $27 billion in offset balances, which is about 10 per cent of its home loan portfolio.
Lenders’ investor mortgage balances continue to fall, despite all the talk of a recovery in the housing market.
According to the latest Reserve Bank figures, total investor mortgage balances fell by 0.1 per cent in September, compared with the previous month, and fell by 0.1 per cent over the 12 months to September.
Owner-occupier mortgage balances grew by 0.4 per cent in September and by 4.8 per cent over 12 months.
Overall lenders’ mortgage balances grew by 0.2 per cent in September and by 4.8 per cent over 12 months.
According to the latest APRA mortgage lending data, ANZ, NAB and Westpac all continue to experience reductions in the size of their mortgage books.
Commonwealth Bank is the only big bank to have grown it mortgage book in the past month.
ANZ reported a net profit of A$5.9 billion for the 12 months to September – 7 per cent down on the 2017/18 results. On a cash basis, earnings rose 6 per cent to $6.2 billion.
Income: Net interest income fell 1 per cent to $14.3 billion, compared with the previous corresponding period. Other operating income fell 19 per cent to $4.4 billion. Total operating income of $18.8 billion was down 6 per cent.
Expenses and cost-to-income: Operating expenses fell from $9.4 billion in 2017/18 to $9.1 billion in the year to September – a 4 per cent reduction. The cost to income ratio rose from 49.6 per cent 50.2 per cent.
Impairment charge: The credit impairment charge rose 15 per cent year-on-year to $794 million. The impairment charge represented 13 basis points of gross loans and advances – up from 12 bps in 2017/18.
Credit quality: New impaired assets rose by $227 million – an increase of 26 per cent. This was driven by the Australian retail and commercial and the New Zealand divisions. Loans past due but not impaired increased by 3 per cent to $15.7 billion (although they fell by 9 per cent in the second half).
Margin: The group’s net interest margin fell from 1.87 per cent in 2017/18 to 1.75 per cent in the year to September. The fall was largely due to an “unfavourable funding mix”, as customers switched from interest-only to principal and interest loans in Australia and from variable to fixed rates in New Zealand. Lower interest rates also caused margin compression on the deposit side. The margin for the Australian division fell 10 bps to 2.59 per cent.
Return on equity and assets: ROE fell from 10.9 per cent to 10 per cent year-on-year (on a cash basis it rose from 9.8 per cent to 10.4 per cent). Return on assets fell from 68 bps to 61 bps (on a cash basis it rose from 61 bps to 63 bps).
Earnings per share: Cash EPS from continuing operations rose 2 per cent to $2.27 a share.
Dividend: The bank declared a second half dividend of 80 cents a share for the September half, unchanged from the first half. The total payout for $1.60 a share was unchanged from the previous year. The dividend payout ratio was 70.1 per cent, compared with 71.1 per cent in 2017/18. The final dividend will be 70 per cent franked, reflecting changes in the bank’s earnings mix.
The divisions: The bank’s biggest division, Australia retail and commercial, made a cash profit of $3.2 billion, which was 12 per cent down on the previous corresponding period. Cash profit for institutional was $1.8 billion – up 24 per cent. New Zealand was down 8 per cent to $1.4 billion. Pacific was down 18 per cent to $59 million.
Market share: Australian home lending has suffered a significant fall in market share – down from 15.7 per cent in 2017 to 15.5 per cent last year and 14.3 per cent currently. New Zealand home loan market share has fallen from 31.1 per cent to 30.7 per cent over the same period.
Capital: The bank’s common equity tier 1 ratio was 11.4 per cent at the end of September, down from 11.5 per cent at the end of March. Customer remediation costs reduced CET1 by 16 bps.
Funding: Customer deposits grew by 5 per cent over the year to $511.8 billion. Wholesale funding grew by 1 per cent to $270.3 million. The net stable funding ratio is 116 per cent.