The volatility the onset of the COVID-19 pandemic produced in the economic outlook was extraordinary. This time last year for example, ANZ’s economists estimated that housing prices could decline more than 6 per cent in 2021 in Australia - now the expectation is they could increase 17 per cent. Gross domestic product was expected to be well down and unemployment higher.
To arrive at a suitable provision outcome for the Group, ANZ’s management team, together with the Board, have to look through this volatility in outlook and use judgement to determine how ANZ should be positioned.
"There is still a fair bit of uncertainty across the various economies we operate in and being strongly capitalised is important.” – Shane Buggle
While the economies of Australia and New Zealand have managed well through the first stages of the crisis, the pandemic is far from over and remains a volatile and unpredictable event, and so the bank believes some caution remains necessary.
ANZ’s statutory and cash profits were well up on the prior half with a net credit provision release of $A491 million a key positive. Notwithstanding that release, the Group’s collective provision balance remains robust at $A4.3 billion.
I sat down with ANZ’s Acting Chief Financial Officer Shane Buggle and Chief Risk Officer Kevin Corbally to walk through the details of this result and discuss the bank’s outcomes for capital, margins and costs.
Click here for a transcript of this conversation
The bank recorded a Common Equity Tier 1 Ratio of 12.4 per cent – more than $A7 billion above the Australian Prudential Regulation Authority’s ‘unquestionably strong’ benchmark – a result that allows the bank flexibility to consider future capital management.
“Capital efficiency remains a key element of ANZ’s strategy and you’ve seen the Group’s focus on that pay off over the last five years,” Buggle explained. “However, there is still a fair bit of uncertainty across the various economies we operate in and being strongly capitalised is important.”
Buggle says the bank will be focussed on managing the balance between a strong capital position and the desire for capital efficiency.
On the release of a net credit provision of $A491 million, Corbally clarifies that in the 2020 financial year the bank set aside $A1.7 billion of additional provision charges between March and September for a rainy day but “essentially it hasn’t rained as much as we thought it might”.
“The improved economic outlook - noting that this is relative to what were pretty dire estimates this time last year - gives us comfort to release some of that build-up in provisions,” he said.
“Nevertheless though, we thought it was prudent and appropriate to hold onto a significant amount of the build-up given… we are not out of the woods yet.”
When thinking through the drivers of the bank’s strong result on margins – the best performance in a decade - Buggle says the trading environment has both helped and hurt.
“We saw a negative 3 basis point (bps) impact arising from holding higher liquid assets,” he said. “The higher liquids meant we reduced our reliance on the Reserve Bank of Australia’s committed liquidity facility and so while negative for margins, it’s actually a positive for returns.”
Buggle also stepped through the margin changes across assets, Institutional lending, liabilities and deposit pricing.
On another solid result of good cost outcomes, Buggle says the bank has been consistent on cost management since 2016, especially on the day to day costs of running our business.
“The way we think about it is to focus on continuing to reduce what we call ‘running the business’ costs so that we can increase investment in what we call our ‘accelerated strategy’ without increasing the overall cost base,” Buggle explains.
“We’ve continued to invest… in digital channels, process automation, optimising our property footprint and simplifying end to end processes – broadly this is work to be able to deliver faster, better, cheaper services to our customers over time and a better experience for our teams and staff.”
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
05 May 2021
05 May 2021