ANZ chief executive Shayne Elliott says the bank has a real-time view on wages, house prices and inflation. He’s not worried about what comes next.
ANZ boss Shayne Elliott says banks can weather any downturn in the economy, because credit risks no longer sit on their balance sheets. , Mr Elliott said Australian banks were prepared to support the relatively small number of customers that might fall into hardship as home prices fall.
After ANZ completed its exit from the wealth management business during the year, Mr Elliott toldsweeping regulatory changes since the royal commission into banking misconduct have left the banking system in good shape. “Buy now, pay later has come in and whatever anybody says, it is a risky option and you can see that they’re suffering more from defaults, which we’re not seeing in the bank,” he said. He also pointed to the commercial property space, where ANZ is the smallest participant of the big banks relative to the size of its balance sheet.“A lot of the developments you see around Melbourne, the smaller ones are even financed by finance companies so they’re not sitting on the banks’ balance sheet, whereas 15 years ago, all of that stuff would have,” he said. This, he said, is making it difficult to predict where big banks’ losses for bad debts, which remain at historical lows, will peak. “The reality is, try as we might [predicting where the credit cycle turns] is really hard to see right now,” Mr Elliott said. “Even when things get a bit harder... it’s hard to really see a material hit on provisions over the next 12 months or into financial year 2023.” Mr Elliott said ANZ has a real-time view of housing markets so can reach out to borrowers early, adding the overall exposure to customers who are approaching or in negative equity - where the value of their home is below the loan they need to repay - is currently limited. “It’s worth noting that 13 per cent of Australian postcodes have already experienced average house prices falls of more than 10 per cent,” he said.“Our total exposure in those postcodes to those currently in negative equity is around 0.4 per cent of our book, or $780 million. “That exposure would rise to around 1 per cent should values fall a further 10 per cent. While that can be stressful for some customers, we stand ready to help and are well-prepared financially.” Mr Elliott said ANZ is becoming more wary of lending to mining towns, but has not blacklisted any postcodes.“We do put a red line around some postcodes - for example if you’re in a mining town that is inherently riskier,” he said. “We don’t say “no”, but we’ll probably do a bit more due diligence and we may not lend to the same degree.”Rising wages are expected swell ANZ’s underlying cost base throughout this financial year, Mr Elliott told analysts, with salary inflation rising from 2 per cent to 4 per cent during the year to September 30 across the bank’s 32 markets. Chief financial officer Farhan Faruqui said cost pressures would only intensify over the coming months with inflation running hot. “If you look at the impact of inflationary pressures that’s $164 million [in the financial year just ended] – given where we are right now that number could be easily double,” he said.“If we look at the cohort of Australian home loan customers who have been with ANZ over the past year, where we can track salaries, the average customer has experienced a 5.5 per cent increase in income,” said Mr Elliott. “The New Zealand experience is the same with an increase of 6.6 per cent. In both cases, that’s about the same level as inflation and so customers can maintain lifestyle and for many, increase savings or pay down debt.”Mr Faruqui said ANZ had drawn less upon the Reserve Bank’s term funding facility to support writing new fixed rate loans, leaving it less of a challenge refinancing debt.There is no question that funding costs are increasing, the wholesale market is getting more expensiveNear-record low unemployment levels are still driving record low loan losses, but Mr Elliott warned the outlook for the next six months remains uncertain with cost of living pressures, inflation and gloomy consumer sentiment. “It’s clearly an issue, not only at the supermarket and petrol station but also with household utilities, and now the cost of housing – whether rent or mortgage repayments,” he said.ANZ shares were trading 3.5 per cent lower at $24.93 just before the close of trade on Thursday, bucking a more positive trend among its peers, as investors banked recent gains.Milford Asset Management portfolio manager Will Curtayne said investor reaction was driven by costs and outperformance over the past month. “Costs disappointed again but I think mostly many market participants were investing in ANZ to trade the good margins at this result even though they’re not natural long-term owners of ANZ,” he said. “Now that this trade has played given ANZ was up 13 per cent for the month they’re taking profits and selling. They don’t want to be there when the economy gets worse next year.”
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