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ANZ grapples with New Zealand capital question

Thursday 31st October 2019

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Australia & New Zealand Banking Group has the vexed New Zealand question top of mind, with the capital proposals of trans-Tasman regulators a particular focus for the lender. 

Its New Zealand net profit fell 8 percent to $1.83 billion in the 12 months ended Sept. 30, as fair value movements on financial instruments and insurance policies, and year-earlier gains on asset sales pushed the bottom line around. 

Cash earnings from continuing operations fell 4 percent to $1.53 billion, as New Zealand's biggest bank lifted its provisioning for bad debts to $92 million from $6 million a year earlier. It also faced a 5 percent increase in operating costs to $1.33 billion as compliance expenses mounted. 

Group chief executive Shayne Elliott described New Zealand's performance as a solid underlying result in an increasingly competitive environment. 

"Compliance and remediation costs contributed to higher operating expenses. This was mainly driven by the complex work required to comply with new regulatory standards that all subsidiary banks be able to operate as stand-alone entities," he said. 

ANZ is dealing with both the Australian Prudential Regulation Authority and the Reserve Bank of New Zealand on proposals that could lift the amount of capital needed to be held by the Kiwi subsidiary. The lender said the outcome was uncertain, and the board would consider capital management options once the changes are known. 

"Capital efficiency will remain a focus, particularly as we manage the proposed changes impacting our business in New Zealand," Elliott said. 

"While these changes are not final, we are starting from a strong capital position with solid organic generation capability."

The issue is big enough for ANZ to include resolving its New Zealand challenges as third on the list of a six-point plan. While the looming changes to capital requirements are the principal issue talked about, an investor presentation slide also notes the Reserve Bank's policy to limit outsourcing by local bank subsidiaries to their parent companies. New arrangements due by 2022 are another complication. 

ANZ New Zealand's reputation took a number of hits during the past year. It was forced to hold more capital against its housing and farm lending and was censured by the Reserve Bank over persistent failures in its controls and attestation processes.

More recently, the Financial Markets Authority said it should have disclosed a property sale to the wife of former chief executive David Hisco, who left the bank under a cloud of controversy over his personal expenses. 

Acting New Zealand chief executive Antonia Watson said it had been a challenging 12 months for the local unit reputationally, but that the bank had performed well. 

"While underlying revenue growth has been subdued, both customer deposits were up 5 percent, and gross lending up 4 percent. Our focus on responsible lending means credit quality remains strong and provision charges low," she said. 

The New Zealand banking division contributed about 22 percent of ANZ's group cash earnings from continuing operations of A$6.47 billion, largely unchanged on the year. 

ANZ's New Zealand net loans rose to $125.99 billion as at Sept. 30 from $121.55 billion a year earlier, while deposits were up at $90 billion from $87.1 billion. Its net interest margin shrank to 2.33 percent from 2.42 percent. 


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