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ANZ says cost reduction target may slip as as COVID-19 impacts income

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ANZ says cost reduction target may slip as as COVID-19 impacts income

Australia and New Zealand Banking Group Ltd. said it may miss its target of running the bank for less than A$8 billion by 2022, though it will continue to invest in technology to become more efficient amid slowing credit growth.

The bank's goal of shaving about A$1 billion in annual costs over three years announced last year is "going to be harder today to be perfectly frank, for a couple of reasons, partly because of COVID," CEO Shayne Elliott said during an Oct. 29 earnings call after the company said its credit impairment charges for the fiscal year ended Sept. 30 rose 2.5 times.

However, Elliott said ANZ will not cut investments, such as spending on technology, just to meet the cost target. "The target was set as an outcome of doing the right thing and running the bank. I'm not shying away from it. I'm just not sure it's going to be '22, but perhaps it's more like a '23 sort of outcome," he said.

The bank's reassessment of its cost-cutting goals is likely a deeper indication of the impact of the coronavirus pandemic on the Australian banking sector as the nation slipped into its first recession in three decades and local lenders pay large fines for misconduct over prior years. The drag from the pandemic and fines are likely to be a common theme in the earnings reports of other Australian banks too. For example, Westpac Banking Corp. said on Oct. 26 it expects an A$1.22 hit on its cash earnings in the fiscal second half as a charge to cover for penalties for violating the nation's anti-money-laundering and counterterrorism financing laws.

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Costs vs. investments

ANZ reported a 42% decline in cash profit for the year that ended Sept. 30 to A$3.76 billion after it set aside A$2.74 billion as credit impairment charges, compared with A$794 million in the year prior. The bank also reported a 3% increase in operating expenses for the year, with personnel expenses rising to A$4.74 billion. Technology expenses increased to A$1.56 billion, taking total cash operating expenses from continuing operations to A$8.61 billion, compared with A$8.53 billion in the previous year.

"We believe the bank's main focus is on the broader objective of cost controls rather than getting costs down to A$8 billion per se. We expect this to be a theme across Australian banks sector wide," said Nico DeLange, an analyst at S&P Global Ratings.

Ratings expects COVID-19 to hit Australian bank earnings in the next two years. "Lowinterest rates, weak credit growth, and drop in fee income — in addition to elevated credit losses — will weigh on bank earnings. We expect the banks to accelerate their technology projects and cost saving programs, partly in response," DeLange said.

ANZ missing its cost target does not have a deeper impact on the bank, said Omkar Joshi, principal and portfolio manager at Opal Capital. "I think it's simply a reflection of the current environment where it's hard to be pushing harder on costs when a large proportion of those cost savings is actually staff," he said comments emailed to Market Intelligence.

Saving for a rainy day

The Australian lender had earlier warned that an after-tax charge of A$528 million related to remediation costs, software amortization and write down of goodwill will hit its cash profit for the fiscal second half.

"What shareholders would have seen was the collective provision increased by $A1.7 billion this year. That's us setting aside money for a rainy day. So we haven’t incurred a loss today, [but] we may at some stage in the future," said Mark Hand, group executive for Australia retail and commercial, in a separate Oct. 29 statement.

Still, the bank noted that the impacts of the pandemic "continue to be uncertain."

The uncertainty had also been flagged by analysts. Australian banks are "operating in a false economy" making it "difficult to gauge the quality of their books or provisioning," said UBS analysts in an Oct. 21 note. Banks are just making educated guesses on expected credit losses and actual losses will not emerge until fiscal 2021, the analysts cautioned.

"Overall, solid result in turbulent times backed by healthy balance sheet and prudentials," said TS Lim, an analyst at Bell Potter. The results were in line with consensus but "ahead of our more conservative numbers due to lower costs and credit impairment charge," Lim said.