ANZ Bank warns of Asia volatility as cash profit rises

[SYDNEY] Australia & New Zealand Banking Group said bad debt charges will be higher than analysts expect in the first half amid a slowdown in Asia and increased market volatility, even after profit rose in the first quarter.

The lender expects a first-half group credit charge a little above A$800 million (S$798.2 million), compared to the current market consensus of A$735 million, the Melbourne-based lender said in a statement Wednesday. Unaudited cash profit, which excludes one-time items, climbed to A$1.85 billion in the three months ended Dec 31, compared with A$1.79 billion reported a year earlier.

The Asian region has been a "little bit more volatile" than expected, Chief Executive Officer Shayne Elliott said in an interview on the lender's website. "It tends to hit in the manufacturing base across Asia-Pacific which today is in southeast Asia, most predominantly Indonesia. And that absolutely is having an impact in terms of our credit books."

This is the first earnings update for Elliott, who after taking over Jan 1 is under pressure to turn around the lender's Asian operations. The Asian business, part of former CEO Mike Smith's plan to make a regional lender to compete with HSBC Holdings Plc and Citigroup Inc, is dragging down return on equity and depressing the share price.

"While ANZ also exhibited almost stable margins and some level of underlying growth like its main competitors, the increase in bad debts largely due to the Asian exposure is a sticking point," Angus Gluskie, a managing director who oversees US$550 million including ANZ shares at White Funds Management in Sydney, said by phone. "It just goes to show the comparatively higher risk in ANZ's books."

The group net interest margin, a key measure of profitability, declined by 2 basis points due to the markets business, the lender said.

Total provisions for bad debts rose to A$362 million in the first quarter, from A$232 million a year earlier. Common equity tier 1 capital, a measure of the lender's ability to absorb future losses, stood at 9.4 per cent as at Dec 31 compared with 9.6 per cent three months earlier.

Employee numbers fell by 2.5 per cent in the quarter, ANZ said without giving more details.

"With the environment presenting a number of challenges, the new management team has taken action to reduce costs, to tightly manage the credit environment and capital, and to simplify and re-position the business," Elliott said in Wednesday's statement.

ANZ's quarterly update rounds off earnings disclosure by the country's largest banks. Commonwealth Bank of Australia warned of risks posed by global economic turbulence Feb 10 as it posted its slowest first-half profit growth since the financial crisis. National Australia Bank Ltd reported a 8 per cent rise in first-quarter earnings Tuesday. Westpac Banking Corp doesn't disclose quarterly earnings.

ANZ shares have dropped 17 per cent this year, the worst performer among the four largest Australian banks. That compares with a 7 percent decline for the benchmark S&P/ASX 200 Index in 2016.

"The ructions in financial markets likely leave ANZ in need of a major strategic reset, with its Asian super regional strategy pressured," CLSA Ltd's Sydney-based analyst Brian Johnson said before the update. He said compared to its peers, ANZ derives a greater proportion of its earnings from financial markets, which are in "structural decline."

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