AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED
ANZ - Trading Update - Mr Mike Smith, CEO and Peter Marriott, CFO
Mon, 28 Jul 2008 10:00AM
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Mike Smith
Mon, 28 Jul 2008
10:00AM Australia/NSW
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AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (ANZ)
ASX code: ANZ
Website: http://www.anz.com.au/
Industry: Banks
Principal Activities:
General banking, mortgage and instalment lending, life insurance, property development, leasing, hire purchase and general finance, international and investment banking, investment and portfolio management and advisory services, nominee and custodian serv
Address:
100 Queen Street, Level 14
MELBOURNE
VIC
Phone: 03 9273 5555
Fax: 03 9273 6142
Executives & Directors
Mr Charles B Goode , Chairman, Director
Mr Michael Smith , CEO
Dr Bob Edgar , Deputy CEO
Mr Jerry Ellis , Director
Ms Margaret Jackson , Director
Dr Greg Clark , Director
Mr John Morschel , Director
Mr David Meiklejohn , Director
Mr Ian Macfarlane , Director
Mr Peter Hay , Director
Ms Alison Watkins , Director
Mr Peter Marriott , CFO
Mr Bob Santamaria , General Counsel
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Company ASX Announcements
Company ASX announcements can be viewed on the ASX website.
Announcements from the preceding six months are shown below.
Please refer to the relevant stock exchange if any of the above information is incorrect
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (ANZ) Events
Australia/NSW
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (ANZ)
| Revised change in substantial holding for STW | Tue, 6 Jan 2009 |
| Media Release - ANZ banking branch in New Zealand | Mon, 5 Jan 2009 |
| ANZ New Zealand Branch General Disclosure Statement | Mon, 5 Jan 2009 |
| ANZ New Zealand Branch Supplemental Disclosure Statement | Mon, 5 Jan 2009 |
| Change in substantial holding in STW | Fri, 2 Jan 2009 |
| Change in substantial holding in SLF | Fri, 2 Jan 2009 |
| ANZ APEP and APEP Plus - Relevant Interest in ANZ Shares | Wed, 31 Dec 2008 |
| Appendix 3B | Tue, 23 Dec 2008 |
| Change of Director`s Interest Notice | Fri, 19 Dec 2008 |
| Ceasing to be a substantial holder of EBB | Fri, 19 Dec 2008 |
Please note: This company appears on this website as a result of its listing on the Australian Securities Exchange. Boardroom Radio does not claim any association with any company listed on this site.
PRESENTATION BY MIKE SMITH, CHIEF EXECUTIVE OFFICER AND PETER MARRIOTT, CHIEF FINANCIAL OFFICER OF AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (ANZ)
“Trading Update”
http://www.brr.com.au/event/48715
MONDAY, JULY 28, 2008, 10:00 AM.
ANZ Good morning to all of you. I am sorry about the late notice, but I am glad that
10 so many of you have taken the time to join us.
As you will have seen this morning, we announced that we would increase our provision in response to the deteriorating economic conditions and the impact that this is having on our business. None of this news is new;
15 however, conditions have deteriorated.
Before I take you through this in detail, let me make the point that having to do this is bad enough, but having to do it at a time when despite the general global economic gloominess, despite the global credit crisis, despite higher
20 funding costs, and higher oil and food prices, despite all that, in terms of our strategic endgame, we are actually making very good progress and we were picking up steam or are picking up steam.
Our personal division is on track for an even stronger second half. We have
25 seen our net profit in Asia. That will be up over 40%. Our full year profit before provisions will be up by around 8% year-on-year and cash profit will be over $3 billion. So I know you will all agree with me that having to announce this sort of provisions is beyond disappointing. In fact, we are also kind of language (inaudible) (0:01:24).
30
When I got here just 10 months ago, I made it very clear to you all that what I saw happening in the world credit market was unique, was different, and we started to take the action required to get into shape for that. However, what is really irritating is that we are having to spend so much time on remedial
35 action. So much time and money on addressing legacy issues when I know that there are real growth potential available to the business.
The reality is that, at least in most western countries, the game has changed in banking. The deterioration in the global credit markets is still playing out
40 with serious impact on the financial systems of the US and the UK. It would be naive to suggest that somehow Australia is immune. The reality is our financial system though is in relatively good shape.
In fact, if you look at market capitalization tables recently, ANZ is actually
45 currently bigger than (inaudible) (0:02:34). It is bigger than Lloyds Bank. It is bigger than Merrill Lynch. It is only just below Barclays and Morgan Stanley. Up to last week, we were heading to be half the size of Citigroup, which is an indictment on what has been happening.
Having said all that, I am under no illusions. The market is volatile and ANZ has underperformed this year. My job is to pragmatically deal with the hand we have been dealt and get the position turned around for our shareholders. The paradox is that while the rest of the western world is into their financial
5 crisis with asset prices falling and demands slowing, in Australia, we are trying to deal with the problem of success. The Australian economy will continue to slow though over the next 18 months, but that will be the result of deliberate Reserve Bank action to cool inflation and that will help underpin economic success in the longer term. In fact, we are facing up to that different
10 environment as well as the issues which are quite clearly of our own making.
Growth is slowing. Energy and food prices are rising. The cost of funding has gone up. So that means interest rates are up. Equities are significantly off. Overall, across the bank, lending growth has slowed, although our net
15 interest margin has stabilized. In Australia, arrears in mortgages and credit cards have risen only modestly, but we do need to take a conservative view as the economy slows further. I think it is entirely unrealistic to assume that the position can be maintained.
20 In New Zealand, the story is different. After a long period of growth, the economy is now contracting. High interest rates and high food prices and petrol prices are weighing heavily on consumers and business. As a result, individual provisions in New Zealand will be around three times higher than last year’s very low levels. Losses from New Zealand commercial and
25 corporate lending have also increased.
But as I said earlier, the main issue we continue to deal with comes from our institutional business. While we are turning around institutional, we still have to deal with a number of legacy issues. This is a challenge that is going to
30 take some time to fix. A small number of previously identified exposures are still causing us pain and including some commercial property clients and provisions for prime broker and Bill Express which are well known. We expect the number for our institutional individual provisions to be around 500 million against 371 million for the last half.
35
Overall, our collective provision charge for the full year will include 325 million for portfolio growth and credit rating deterioration and 425 million to take into account higher oil prices, interest rates, and slowing economic growth. This will bring us to over 1% of credit risk assets which I think is a prudent and
40 responsible level in the current environment. That will actually take us ahead of our peer group.
I do not wish to pre-empt the review of securities lending that David Crawford is assisting me with, but we are addressing some of those issues on an
45 ongoing basis, and once that review is complete, I will take the strongest possible action to put these issues behind us once and for all.
Now, let me make some more important points. We have no direct exposure to US sub prime. We have no exposure to US sub prime or mortgage-related CDOs. In fact, our total exposure to CDOs is 5.5 million. That is million, by the way, and not billion. On commercial property, commercial property exposures are only 8% of the total book. Listed property trusts are around 4%. The portfolio is high quality with a large percentage maintaining investment grade
5 rating. Overall, gearing to the listed property sector is typically under 50%.
With credit intermediation activities, the underlying assets are high quality corporate names in the US, Europe and Australia. These are structures of AAA-rated assets and were hedged with AAA to single A counterparties. The
10 portfolio is still behaving at AAA criteria despite the stress. It consists of 800 high quality names, mainly Fortune 500 type companies. We have assessed the total market valuation on these trades and have taken a further $160 million deduction from income. While these credit intermediation trades continue to maturity, they will be volatile, but we expect to be able to reverse
15 these adjustments in due time as they mature.
If I can turn to funding, we have successfully completed our 2008 term funding program and we are now focusing on the pre-funding for 2009. During the year, we have raised $34 billion in term funding with an average
20 duration of 35 months and an average cost of 70 basis points. Liquid assets totalled 32 billion which places ANZ in a very, very strong liquid position. We intend to exchange the ANZ’s StEPS hybrid securities into ordinary shares at a 2.5% discount under the terms and conditions detailed in the original prospectus. Importantly, we intend to maintain the full year dividend of 136
25 cents per share, fully franked, at the same level as 2007. We therefore anticipate our tier 1 ratio on the 30th of September to be above 7%.
So let me just sum up. The global game has changed and we are managing our business for that. But we also need to get on with the business of growing
30 and delivering and building a super-regional bank and delivering better outcomes for shareholders. That is what I am here for. It is what the management team and our 30,000 stocks are here for. We are making progress on that. It is slower than I had hoped when I arrived, but I am being pragmatic and decisive about our legacy issues, but equally, I am pleased
35 with the good head of steam we are building in the underlying business.
Personal continues to be a standout business. Institutional is turning around. New Zealand is performing reasonably well given the challenging economic circumstances. In fact, we believe it will still have to be the highest profit for
40 any New Zealand company this year. Asia Pacific is growing fast with an excellent management team in place.
No key executive likes to announce news like this that I have today. Our shareholders, our stocks, and our customers have a right to expect better.
45 But rest assured, all of us on the senior management team are committed to doing what it takes to achieve our objectives.
Now let me hand you over to Peter for a little bit more detail on the numbers. Peter?
ANZ Thanks very much, Mike. I thought I would just touch on four areas where you have probably noticed some observations within the trading update. You get a little bit more background to those. First of all, you will see that we are
5 saying here that our income for the year is expected to be between 8% and 9% which is obviously below what the market was originally expecting. Importantly, the personal business and the Asian business continue to be growing at the rates we were earlier expecting, and when you look at this, the main reasons for the reduction in our growth rate is in fact limited to four
10 things. First of all the valuation adjustment that Mike mentioned before, the financial guarantors take 1.5% off their income growth rate. They’re moving in exchange rate over the last three months. They take about 0.6% off the exchange rate. This (inaudible) (00:11:40) environment in New Zealand where we have commented that New Zealand is having essentially zero
15 income growth this half, takes off about 0.3. And then finally there’s a deal in the institutional business where there’s a debit to income of about $70 million which is offset by credit tax so the AC effect is neutral but from an income growth point of view that takes off about 0.6.
20 So when you adjust to those factors, that explain what’s the difference between where the market was thinking we’re going to be from an income point of view and the 8 to 9 number that you mentioned here. And in fact that explains about 3% income growth so that’s 5% in GDP?
25 Most importantly I think certainly compared to the situation over the last couple of halves, and again as Mike said, margins have stabilized indeed for the third quarter and the margin was 2.3%, 203 basis points compared to 199 basis points for the first half and that’s the effect of the pricing initiatives offsetting the rising cost of funding and less competition on the asset column
30 of the balance sheet.
On costs, you see here we’re talking about cost cuts of about 9%. A couple of key observations here. All of our divisions have positive jaws with the exception of the institutional business and the institutional business of course
35 has negative jaws because of the income we were just talking about before. Then the other point to stress of course is that over one quarter (inaudible) (00:13:13) in Asia, and once there’s 40% growth rate in Asia in cost, there’s a corresponding growth in income as well so that pushes up the overall growth in cost for the group.
40
From a provision point of view, we have got a lot of due diligence over the last 10 days and brought forth a normal half yearly assessment of the equity provision charge which is seen mentioned in here. Overall our provisions are projected to be up about 1.6 billion in 2007 and 84% of that relates to
45 institutional and about 9% to New Zealand where we’re seeing an increase in provisions over there as you mentioned in the release.
Mike has spoken about the same day charge, and in particular there, we have stood back and recognized that a lot of the effects of things like higher oil prices, the higher interest rates, and higher food prices are going to have a lag effect on our rating profiles and there are other factors within the portfolio which suggested to us that it’s appropriate to increase the scenario component of our collective provision. To put that in context, there’s only 15%
5 of the balance of the collective provision so we’re saying we need to have 15% more than the normal to reflect the unusual conditions that are likely to prevail.
Then in terms of our credit intermediation trade, it’s obviously a very complex
10 area. We’ve set up more information and Mike summarized it very well in his introductory comments that these are very different types of structures to the ones that attract a lot of attention, for example, late last week corporate names they continue to remain in AAA criteria. And in addition to the high quality of the underlying assets, we have of course the protection from
15 financial guarantors.
But of course we live in mark to market world. And in mark to market even though we do not expect to incur a lot from these transactions, the credit spreads are wide and there’s a negative market value which is then offset by
20 the positive market value on the financial guarantors. As you will see from the (inaudible) (00:15:30) about 80% of those financial guarantors continue to be rated AAA but the market practice now is to also adjust the value of the derivatives for those counterparties by credit valuation adjustment which is effectively allowing for the widening in credit spreads on the name on those
25 counterparties and marking down the value of the receivables from those counterparties. And that is being charged $160 million trading income and that is also a mark to market number that will move all the time as credit spreads change.
30 Mike covered off funding and I think key thing here again is that we have the highest level of liquid assets we have ever had and funding costs are being passed off in our margins. Hence, margins have been recovering. Finally from a capital point of view, the obvious question is what’s the impact of these adjustments that we placed on this current release on the capital ratio and our
35 capital ratio as of 30th of June, both adjusted for the change to include interceptors from the banking book and also for the first of July (inaudible) (00:16:42) remaining under the DIP underwriting which was in fact 7% so we have maintained a capital ratio which in fact was stronger than what it was at the end of March, and as Mike said, looking to see that that ratio continue to
40 be above 7% by September. So with that comment, I’ll pass it back to you.
Operator We will now begin the question and answer session. If you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. If you wish to cancel the request because your question has
45 been answered, please press the #. Your first question today comes from Robert Camilleri from Portfolio Partners. Please go ahead.
Q Good afternoon. I was wondering if you could speak briefly about your ongoing capital requirements in regards to that hybrid space. I mean, obviously you’ve taken the position to convert the existing steps into equity but what’s your ongoing requirement in regards to borrowing in that space going forward given the current market climate.
ANZ The decision to convert the ANZ’s StEPS program into equity basically
5 reflects the market conditions at present. We’d still like to do a hybrid issue at some stage and that keeps our options open. But it also allows us to look the dividend reinvestment program and to give a discount on that at the end of the year should we need to do so. So I think that it’s just providing us with a degree of extra flexibility.
10 ANZ Yeah, I’ll add to that with the conversion of StEPS into ordinary shares where we have in fact quite a bit of capacity to issue further hybrid and our ratio with 16% with the conversion of StEPS, so there is a lot of capacity for issuing more hybrids than when opportunities arise. And obviously part of the capital planning every year you need to be raising amounts of hybrid to supplement
15 the natural retained earnings so raising hybrid equities is an ongoing part of the capital management.
Operator Your next question today comes from John (inaudible) (00:19:02) of UBS. Please go ahead.
20 Q Hi, guys. Just had a question on credit intermediary trade. I just wanted to get a feel for the sensitivity that you have and the credit valuation adjustment to any changes in both the writings and the spreads of the monolines lines and can you give us a list of the names of which monolines you have exposure to?
25
ANZ Taking the first part of your question, it’s not our habit to (inaudible) (00:19:30) details of the names of our customers at least so long as they continue to perform. So I would like you (inaudible) (00:19:38) details of the names. The credit valuation adjustment is a function of the writing and so
30 obviously as a counterparty (inaudible) (00:19:50) down the rating profile, the credit valuation adjustment will increase. You’ll notice that we have one counterparty down there which is on investment grade. That of course is the one that we had a provision for in the first half and you can see that by the time that you’re down to that stage, you end up with 100% credit valuation
35 adjustment. But AAA will hold some of the credit valuation adjustments that are relatively modest but it’s usually a function of what happens to the ratings of these counterparties. Remembering of course again that the underlying asset – this is simply protection over the underlying asset on the derivatives where we have sole protection, and long term, we expect not to lose money
40 on those derivatives and to write back any mark to market negative value.
Q If you have a downgrade from say AAA to a notch or two below, what would be the sensitivity on the portfolio? Are we talking hundreds and million of dollars? Can you just give a sensitivity?
45 ANZ Well, certainly if you have a couple of downgrade in this portfolio. You could see the CBA adjustment there. You could see the number there of US$191 for an investment rate, that is. We had a quarter of this portfolio downgrade a notch, in fact, a couple of notches, you can see that number doubled. It’s reasonably sensitive to follow (inaudible) (00:21:10) just the vagaries of mark to market.
ANZ Yeah. But I think it’s also important to understand that a lot of this protection has been brought by effectively closed funds so there’s no cash leakage,
5 therefore, there should be no reason why the AAA rating will reduce. However, it’s also important to understand that these are derivatives instruments. What you’re seeing in the section on Page 6 of the pack is the bought protection side, and as Peter said on the sole protection side which has got the underlying credit risk, we don’t see any concern and it is likely
10 that all of this reduction to income will be brought back to book.
Operator Your next question today comes from James Freeman of Goldman Sachs JBWere. Please go ahead.
Q I’m sure Peter (inaudible) (00:22:12) plenty of questions on the credit quality,
15 so I am going to just actually ask on capital. You’ve said there that your dividend is going to be flat and tier 1 will be about 7% beyond giving an indication whether that would be written an underwritten DIP or underwritten dividend, I mean, it’s not a gradual point in having a flat dividend if it is just being funded out of shares. Can you comment on whether that dividend is
20 planning to be underwritten and whether your capital guidance has any indication on the DIP underwriting in there?
ANZ Yeah. The comment we made here, James, is that we have retained that flexibility and we will obviously revisit that closer to – at the time of the full year announcement as to whether we wish to underwrite the DIP or not. But
25 we have definitely retained that flexibility and it’s obviously something which is quite possible.
Q Put in another way, your target here tier 1 about 7% that you said. Is that including the DIP underwrite or a function of the DIP underwrite?
30 ANZ James, it does not because under (inaudible) (00:23:11) requirements, we’re not able to recognize the underwritten DIP until such time that the cash come in so therefore to underwrite the DIP, we will not be able to recognize the benefit of that until December when we actually receive the cash.
35 Q All right. Thanks.
Operator Your next question today comes from Tom (inaudible) (00:23:31) from Macquarie. Please go ahead.
40 Q Peter, could you help us reconcile both collective and individual provisions and with the collective, if I look at first half gross observable data in rating downgrade was about 303 million and I think what you’re calling now is a cycle adjustment with about 125 and so on the full year numbers for those categories 325 and 425 the second half numbers if you could help us
45 reconcile those because what I can come up with is that your collective provision for gross and observable performance would be about 22 million. And then on the specific, again it’s a very large number in the second half which we have just attributed to certain commercial property, et cetera, could you give us a bit more detail geographically where that might be and what the split would be between commercial property, securities, lending, and Bill Express?
ANZ Okay. First of all, we’ll take your question around the potential growth and potential portfolio’s duration. Remember that to the extent that a counterparty
5 downgrade is not approved, you reverse the collective provision charges associated with it. So there’s a partial edge back because of that. Mike made a comment early on as far as the trading updates that there are no new names here amongst the individual provisions, i.e., they are all accounts that we knew (inaudible) (00:24:58) some increase in provision and so the
10 extensive shift downgraded the accounts (inaudible) right back to collective provision. In the second half, we’re projecting moderate slip of the balance sheet growth, so you do not have as much balance sheet growth there and there’s still some allowance for risk deterioration, but there’s a credit back by virtue of accounts being transferred from the collective provisioning to the
15 individual provisional downgrade. So I think that helps you to understand what simple subtraction to use (inaudible) (00:25:29) does not quite work because you have to allow for the accounts that have migrated down to non-approval. In terms of where the individual provisions come from, again our normal practice here is not to talk about individual customers. And I think if
20 anyone is interested in actually talking about individual customers, the only two individual customers we have spoken about, of course, have been those two who were receivers or administrators that have been appointed in terms of Bill Express where there is a $53 million provision. And in terms of prime broker where we’re thinking that provision is likely to be higher than earlier
25