Beneath the ostensibly unpleasant headline numbers, the ANZ Bank results reflect rational and surprisingly positive behaviours by the bank and its customers.
Certainly, with a lot of help from the federal government and some unexpected resilience from its customers, the result – an apparent 42 per cent slump in full-year cash earnings – is far better than might have been anticipated at the onset of the pandemic.
ANZ’s worst fears – a massive hit to economic growth, soaring unemployment and customer defaults – haven’t been realised even though the second wave and protracted lockdown in its Victorian small business heartland might have been unforeseeable.
The willingness of the federal and state governments to throw the kitchen sink at the pandemic early, regardless of cost or concern about the finer detail, and the banks’ support for their customers, have obviously been major factors in outcomes that are well short of any worst-case scenarios, at least so far.
More unexpected has been the way customers have responded to the dire threats to their finances.
As ANZ’s chief executive Shayne Elliott says, the bank’s small business customers have responded to the pandemic as a good corporate treasurer of a big business might have.
They’ve hoarded cash – ANZ’s customer deposits have soared $21 billion.
They’ve not raided their reserves – balances in offset accounts have risen $6 billion.
They’ve paid down their highest-cost debt – credit card balances have fallen 18 per cent.
Most of those who deferred their repayments have restarted payments as quickly as possible.
Perhaps the financial resilience of small businesses and home loan borrowers has been underestimated.
At their peak, ANZ customers deferring home loan repayments totalled about 86,000 and small and medium-sized businesses with deferrals about 22,000. The number of home loans still being deferred has fallen to 51,000 and SMEs to 10,000 and in both sectors less than 20 per cent have asked for an extension of the deferral period. If not for Victoria the proportions would have been significantly lower.
It is conceivable that at some point next year those households and small businesses – businesses in particular – that have hung on through the worst of the pandemic and lockdowns will have exhausted their resources and hope. The banks expect to see loan losses spike in the middle of next year.
The unprecedented support the governments and banks have provided businesses and individuals, however, means that the losses and distress are likely to be far smaller and, for the banks, far more manageable, than the last period of real economic and financial distress.
In the early 1990s two of the four major banks (Westpac and ANZ) were nearly toppled by the waves of loan losses flowing from corporate collapses, imploding property prices and soaring unemployment.
ANZ entered the pandemic with a lot of excess capital and, against the odds, has retained it. Its common equity tier one capital ratio was expected to fall to or below the regulatory minimum of 10.5 per cent (a benchmark the Australian Prudential Regulation Authority relaxed at the onset of the pandemic) but has remained virtually unchanged at 11.3 per cent. That represents about $4 billion of excess capital.
The strength of its balance sheet has enabled it to pay dividends, albeit much-reduced, but has also allowed it to make sure it hasn’t wasted the crisis. When there’s an expectation of bad news in the market, intelligent organisations ensure they deliver it.
Despite relatively modest loan losses – individual provisions rose from $778 million to $1 billion – ANZ increased its collective provisioning by $1.7 billion over the year. Its total provisioning for loan losses has increased by almost $2 billion.
Earlier this week the bank announced it would book $528 million of “large notable items” in the result, mainly accelerated remediation costs and software amortisation. It has also increased its investment spending by about $500 million, to $1.7 billion.
If there is an expectation of a poor result it is possible to take a conservative stance, increasing provisions as insurance against future uncertainties and taking a profit and balance sheet hit today to improve the P&L in future.
A better guide to ANZ’s underlying condition is its cash earnings before impairments, tax and those large notable items, which was down only 1 per cent.
In an environment where there has been little growth in bank lending – ANZ increased its loan book by 1 per cent – and where ultra-low interest rates and increased non-interest-generating liquidity compresses net interest margins, that’s a very creditable performance. The bank’s net interest margin shrunk from 1.69 per cent to 1.57 per cent over the year.
A contributing factor to the solid underlying performance was the ability to contain costs, which essentially flat-lined despite the big increase in investment spending.
The course of the pandemic will shape the bank’s future and its impacts are likely to be more evident in the current financial year than they were in the year to September.
ANZ, back in March, planned for the worst. Its worst-case was for a 13 per cent dive in GDP and 13 per cent peak unemployment. Thankfully, that hasn’t yet eventuated, with the economy looking like it is pulling out of recession and the unemployment rate hovering around 7 per cent.
Those conditions could deteriorate as the federal relief packages and the banks’ forbearance wind down and the underlying job and loan losses are revealed.
The ANZ result indicates, however, that by buying time and keeping Australians afloat through what should be the worst of the pandemic – thanks to minimal interest rates, manageable cost to both – the governments and the banks have orchestrated an outcome that is much less painful for taxpayers, bank customers and bank shareholders than it might have been.
Source: Thanks smh.com