ANZ Group posts 6.2% rise in Q1 earnings, says NZ margins under pressure

ANZ New Zealand has posted a 29% fall in first quarter profit after a NZ$120 million reversal in hedging activities and valuations on securities held by the bank.

The bank's general disclosure statement for the three months to December 31 shows unaudited profit after income tax of NZ$296 million. That's NZ$119 million, or 29%, down from NZ$415 million in the same period of 2011.

The drop comes with operating income down NZ$171 million, or 17%, to NZ$847 million. The bulk of the drop came from lower "other operating income", which tumbled NZ$134 million to NZ$85 million. The bulk of this drop stemmed from a loss of NZ$23 million from hedging activities and financial liabilities designated at fair value, compared with a profit of NZ$97 million.

An ANZ NZ spokesman said the drop came after volatility caused a temporary spike in the value of derivatives and policyholder assets a year ago.

"This reflects adjustments the whole sector has experienced with FX and basis hedge valuations due to volatility in Europe, followed by the return to more normal levels as the situation in Europe has improved over the past year.

Net interest income fell NZ$23 million, or 3%, to NZ$655 million.

Operating expenses were down NZ$4 million, or 0.9%, to NZ$398 million despite costs of NZ$18 million in the December quarter stemming from shifting the ANZ and National banks onto a single banking technology platform. The reduced overall costs were attributed to productivity gains from simplifying the business. ANZ's provision for credit impairment fell NZ$2 million, or 4%, to NZ$44 million.

Lending up NZ$729 million; Margins 'softer'

The disclosure statement also shows gross loans and advances up NZ$729 million, or 0.75%, in the quarter to NZ$98.086 billion. Total deposits and other borrowings, including the likes of term deposits, secured debenture stock at UDC and commercial paper, increased NZ$3.4 billion to NZ$77.080 billion. Deposit growth, alone, was up NZ$2.3 billion, or 3.5%. 

Meanwhile, Australian parent ANZ Banking Group said in its first quarter trading update that margins at its New Zealand unit have been "softer". ANZ NZ includes the ANZ and National banks, UDC Finance and fund manager OnePath. In September ANZ announced it would be phasing the National Bank brand out over two years.

The ANZ Group's unaudited cash profit for the three months to December 31 rose 6.2%, from the same period of the previous year, to A$1.53 billion. However, CEO Mike Smith said reasonable volume growth, particularly in Asia, was offset by margin pressure in New Zealand and in ANZ's international and institutional banking division.

"In Australia and New Zealand we won share in a number of priority markets including retail deposits and mortgages," Smith said.

"In New Zealand, although cost management has been a continued focus, margins have been softer."

The ANZ NZ spokesman said margins were down "from their 2012 peak" due to a range of market factors, including customers' moving from floating to fixed-term mortgages.

"We expect that later quarters will give a better indication of how we are tracking," the spokesman said. "However, our above-market growth in deposits and lending, and tight management of costs (down nearly 2% on Q1 last year), demonstrate a strong operating performance in the first full quarter of the new ANZ. Our aim is to keep growing our market share as we work to build New Zealand’s best bank."

'Smooth' phase out of National Bank brand so far

Smith said the initial phase of integrating the ANZ and National Bank brands has gone smoothly.

"While the (New Zealand) revenue environment remains subdued the simplification programme is delivering productivity benefits including reductions in technology operating costs," Smith said. "As expected, margins have declined from their 2012 peak impacted in part by a short term tactical campaign during December. Credit quality trends remain benign."

The tactical campaign referred to was ANZ's 4.95% fixed rate mortgage special that ended in mid-December.

Reporting annual results last October, ANZ said ANZ's NZ division net interest margin, which covers its retail, small business, commercial and agriculture units but excludes its New Zealand institutional and wealth operations, dropped seven basis points in its second-half year (six months to September 30) to 2.59%. The bank also reported record annual net profit after tax of NZ$1.265 billion, an increase of 17%.

Smith said the ANZ Group net interest margin was flat relative to the end of the bank's previous financial year in September, but down slightly when ANZ's global markets division is excluded.

Here's ANZ's full trading update.

(Updated with details of ANZ NZ Q1 figures, comments from ANZ NZ spokesman).