ANZ chief flags economic headwinds and rising funding costs

Announcing the major bank’s first-quarter profit yesterday, ANZ CEO Shayne Elliott said that although the group’s underlying businesses in Australia remain strong, he sees challenges ahead driven by the volatility in international markets.

“There’s undoubtedly going to be some challenges as a result of the slowing global economy and, in particular, the slowing Asian economy,” Mr Elliott said.

He added that ANZ is taking a view that the environment it is working in continues to be volatile and “a little uncertain”, and the best thing that the major lender can do to be prepared for that and to mitigate some of that is be “really, really tightly managed in terms of our resourcing”.

“So there’s a big item here in terms of cost management and we saw [in the] first quarter absolutely some great outcomes in terms of that, and that will continue to be a focus. But, equally, it’s also about capital efficiency and making sure that every dollar of our capital is wisely allocated,” he said.

Mr Elliott said that while Asian markets have been slowing for some time, 2016 has so far seen more volatility than the bank expected.

“Some of those conditions have been a little bit more difficult. And so where does that hit? It tends to hit in the manufacturing base across Asia-Pacific which today is in South-East Asia, most predominantly Indonesia. And that absolutely is having an impact in terms of our credit books. And we’ve started to see that in the recent weeks and we’ve flagged that in our result update,” he said.

ANZ posted a $1.85 billion cash profit for the three months to 31 December 2015, up 4 per cent on the prior corresponding period.

“The Australian and New Zealand economies are performing well with low interest and exchange rates supporting the transition to more balanced growth following the commodities boom,” Mr Elliott said.

“We have seen very good performances in our retail and small business segments, however, corporate borrowing demand remains subdued. The domestic credit environments were stable, although there are pockets of weakness associated with low commodity prices,” he said.

Mr Elliott noted that funding costs for banks and corporates that borrow in the capital markets have risen “in a fairly material way”.

“You’ve seen that some of that has meant that there has been a repricing in certain parts of the economy,” he said. “So that’s absolutely real and we’ll see where that plays out.”

ANZ’s APRA Common Equity Tier 1 (CET1) ratio was 9.4 per cent at 31 December 2015.

The bank noted that, excluding the impact of the 2015 final dividend payment, the CET1 ratio increased 45 basis points compared to 30 September 2015, primarily driven by organic capital generation and assisted by the Esanda portfolio sale.

[Related: ANZ announces major executive changes]