ANZ chief executive Mike Smith and chief financial officer Peter Marriott were on the back foot yesterday, defending some of the options they had taken in the preparation of the bank’s financial report for the March 2009 half year.
Smith talked to what he called the bank’s underlying profit rather than the cash earnings figure usually preferred by banks, saying that shareholders had asked to see the “underlying trends in the core business”.
While the underlying profit showed a four per cent increase on the previous corresponding period, the statutory net profit was down 28 per cent on last year’s March half and cash earnings were down 43 per cent.
Smith was also queried by analysts on the bank’s decision to reduce the collective provision charge during the half, which resulted in a release of $96 million.
With the bank reporting a big jump in charges for bad and doubtful debts and forecasting further increases in impaired assets in the September 2009 half and also the March half in 2010, investors were wondering about the logic of reducing provisions.
The bank’s net profit was $1.4 billion, down 28 per cent on the previous corresponding period. Income was up seven per cent but expenses were up 14 per cent. The charge for bad and doubtful debts was $1.4 billion, up from $681 million in the previous corresponding period.
Non-cash items that were removed to come up with cash earnings included a $461 million gain on economic hedges used to manage the bank’s interest rate and foreign exchange risk.
With this and a couple of other minor adjustments the cash earnings came out at $954 million, a fall of 43 per cent on the March half last year.
To achieve its underlying profit result the bank removed items which it deemed not part of core business. A couple of these were controversial.
One was the bank’s share of a settlement with investors in a couple of failed high yield fixed interest funds sold by ING New Zealand. ANZ will contribute $97 million after tax to a guaranteed payout to investors.
Selling dud funds might be bad business but it is hard to argue that losses associated with funds management are not core business to a bank that owns half of ING Australia and ING NZ and has $34 billion of funds under management.
The other contentious item was losses incurred by business groups within the bank’s institutional division. The bank conducted a strategic review of the division and decided to get out of some areas, including alternative assets, private equity and structured credit intermediation.
The bank took a hit of $664 million on its credit intermediation trades and $114 million on its private equity and alternative assets businesses during the half.
With these and some other adjustments the modest cash earnings turned into a far more robust underlying profit of $1.9 billion, up four per cent on the previous corresponding period.
One analyst’s comment about the bank’s decision to remove items relating to discontinued institutional business was that “they were continuing businesses when they made the losses.”
The bank’s approach to provisions also generated plenty of discussion yesterday. The bank reported individual provisions jumped from $378 million in March 2008 to $894 in the September half and $1.5 billion in the latest half.
The institutional division was responsible for about half the individual provisions and almost three quarters of the increase.
The collective provision was reduced by $566 million during the half, resulting in a release of $96 million. As a result the charge to earnings was $1.4 million.
The bulk of the reduction in the collective provision ($228 million) came from concentration risk.
Marriott said the increase in provision for concentration risk last year was due to the bank’s fear that a number of high profile corporate loans would become impaired. Those impairments had been crystallised in the latest result.
Marriott said: “You can’t raise an individual provision and a collective provision against the same risk. The situation that gave rise to the increase in the provision for concentration risk has resolved itself.”
But analysts were still puzzling over the fact that the bank had reduced its collective provisions in areas such as coverage for lending growth. The bank reported a seven per cent increase in net loans and advances but reduced its provision for lending growth from $131 million last year to $67 million in the latest half.
Smith said investors should look at total provisions as a percentage of risk-weighted assets. At 1.06 per cent it is lower than the 1.13 per cent reported last September but higher than in previous periods. Back in September 2007 it was 0.72 per cent.
Smith said there was now little risk from large single names. In the period ahead impairments would come from middle market corporate customers.
The SME and retail market would be hit in 2010 as high unemployment started to bite. ANZ is forecasting that unemployment will peak at 8.8 per cent in this recession.