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ANZ Bank chief executive Shayne Elliott says the bank will not step back from a mortgage market that is the most competitive he has seen, despite home lending becoming a far less profitable business for Australia’s banking giants.
As ANZ delivered half-year results on Friday, which showed cash profits hit $3.8 billion in the six months to March, a focal point for investors is how retail banking profitability is performing amid growing competition in home loans.
ANZ CEO Shayne Elliott noted some rival banks had spoken about pricing being “irrational” in mortgages and they were keen to allocate capital else – which he said amounted to “walking away from that business.”Credit: Arsineh Houspian
Profits in the March half have been pushed sharply higher by rising interest rates, but investors are debating whether this is as good as it gets for banks, which are being forced to compete harder to win home loan customers, while also fighting harder to attract deposits.
Unlike National Australia Bank, which says it has been deliberately growing slowly in mortgages because of the lower returns, ANZ grew faster than the market in home loans in the half.
Elliott said the mortgage market was “extraordinarily competitive” and the returns banks made on mortgages had fallen sharply in the last ten years. He said some new loans were being written below the bank’s cost of capital – the rate of return demanded by shareholders.
Even so, he said ANZ would not be pulling back, and it retained its long-term plan to grow in home loans, where it is the smallest of the big four.
“It’s not as attractive as it used to be. It’s going to get harder because of competition, but we are not prepared to give up, and the reality is that others are,” he said.
Elliott noted some rival banks had spoken about pricing being “irrational” in mortgages and they were keen to allocate capital elsewhere – which he said amounted to “walking away from that business.”
“We’re not prepared to do that. We can afford to stay in the game,” he said.
ANZ has been trying to turn its mortgage business around after previous market share losses, and in the six months to March its Australian home loan portfolio grew from $278 billion to $293 million.
Elliott said the mortgage market is the most competitive he has ever seen. Credit: Peter Rae
By late morning trading, ANZ shares were trading 0.3 per cent higher at $23.51, after it said profits surged by 23 per cent to $3.8 billion in its latest half, helped by a strong performance in its institutional banking unit.
Despite the strong profit growth, some analysts said the bank’s net interest margin (NIM) – which compares funding costs with what it charges for loans – was weaker than expected at 1.75 per cent.
Barrenjoey analyst Jonathan Mott said that despite the NIM being “soft,” ANZ was benefiting from its diversification, including its large institutional bank and its New Zealand arm.
ANZ’s earnings were underpinned by sharply higher net interest income, which jumped 20 per cent in the half, while operating expenses rose 4 per cent and bad debt charges remained relatively low.
‘The next six months will be more difficult than the last. Competition in retail banking is as intense as it has ever been, both in Australia and New Zealand.’
ANZ took a credit impairment charge of $133 million in the half, up from $52 million in the same period last year.
Speaking on the economic outlook, Elliott underlined the stiff competition in retail banking and growing challenges for customers facing higher costs and rising interest rates.
“The next six months will be more difficult than the last. Competition in retail banking is as intense as it has ever been, both in Australia and New Zealand. We understand that sustained higher inflation and interest rates create further challenges for some households and businesses across the economy,” Elliott said.
The cash earnings result is close to market consensus figures cited by analysts at Citi. ANZ will pay a fully franked dividend of 81c a share, up from 74c last year, and the payment will be made on July 3.
More to come
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