PODCAST: delving into the details

Just on a year ago, the COVID-19 pandemic started a contagion of lockdowns and restrictions which disrupted all aspects of people’s lives, jobs and the economy. Through 2020 and into 2021, ANZ has navigated a highly changeable environment and we’ve worked with customers to support them through the uncertainty.

Today ANZ posted an unaudited statutory profit for the first quarter to 31 December 2020 of $A1.6 billion (an unaudited cash profit of $A1.8 billion).

"“Both Australia and New Zealand handled COVID-19 better than almost every other country in the world." - Kevin Corbally

In 2020, all banks were required by international accounting rules to brace against possible economic fallout by significantly increasing provision balances and that impacted heavily on reported profits. ANZ took around $A1.7 billion of provision charges in a six-month period building our provision balance to over $5 billion.

At the end of the December quarter, given an improved relative economic outlook, we released about 10 per cent – or $A173 million – of that build up.

Click here for a transcript of this podcast

ANZ Chief Risk Officer Kevin Corbally says the bank came into this financial year very well positioned from both a capital (Common Equity Tier 1 capital was 11.7 per cent) and a provisioning perspective.

Speaking on a podcast with me and ANZ Acting CFO Shane Buggle, Corbally says the economic outlook has improved greatly relative to “pretty dire estimates” made in 2020.

“Both Australia and New Zealand handled COVID-19 better than almost every other country in the world,” Corbally explains and we’ve seen a flow on in estimated economic outcomes.

The expectation now is for growth in housing prices rather than decline and GDP to return to pre-COVID levels a year earlier and Corbally is forecasting a much lower unemployment level than ANZ estimated last year.

This being said though, Corbally explains there is still some uncertainty in the market, especially with recent “circuit breaker” lockdowns in many Australian states and New Zealand.

One of the other aspects providing confidence in the outlook is the quality of the ANZ portfolio, including trends in the cohort of customers who sought loan repayment deferrals as well as the results of work on the Institutional lending book. “There’s been unquestionably a lot of work on reducing our risk profile and improving the credit quality of our book… over the last number of years,” Corbally says.

Looking at particular highlight of the trading update, the 5 basis point (BPS) increase in Group Net Interest Margins (on an underlying basis NIM increased 3 bps), Buggle says the relative improvement came from a number of factors including asset and deposit pricing - although the headwinds from low interest rates and high levels of system liquidity remained.

It’s difficult to estimate exactly, and Buggle cannot provide any forecast, for where NIM may land at the end of the first half of the financial year, but he says considering the various headwinds and tailwinds, margins on an underlying basis should up slightly compared with the second half of 2020. How much it increases depends on customer behaviour.

“On volumes, the mix benefit of the faster growing retail and commercial book vis-à-vis our Institutional book is likely to continue given the momentum we have particularly in the mortgages book,” he says. “On pricing, the benefits from funding and deposit pricing are largely embedded. So offsetting that, we continue to have the lower rate environment and that impacts our replicating portfolio and impacts our liquidity book. And competition continues to remain persistent.”

Finally, on expense management, Buggle says ANZ has had a consistently flat cost outcome for the last five years.

“We aim to continue to reduce cost in absolute sense,” he says. “That comes from seeking productivity improvements on our business as usual costs and also to invest in the future of the business - partially through the savings from the productivity benefits and partially through our investment spending.”

You can listen to our whole conversation by clicking on the podcast above or by reading the transcript.

Jill Campbell is Group Head of Investor Relations at ANZ

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