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ANZ: H1 2020 Results Reflect COVID-19 Reserve Buildup and Asset Impairment

Australia and New Zealand Banking Group Limited (ANZ or the Group) reported statutory profit attributable to shareholders of AUD 1,545 million in 1H20, down 51% year-on-year. The significant decrease was primarily driven by elevated impairment charges on the credit portfolio and a one-off impairment charge on two Asian equity investments, both as a result of the COVID-19 pandemic. The return on average ordinary shareholders' equity in H1 2020 was down to 5.1%, compared to 10.8% in 1H19.

Net interest income, which is the main revenue source, was down only 1% year-on-year (yoy), mainly due to margin pressure, primarily as a result of the lower interest rate environment in Australia. Overall, statutory total income was 4% lower yoy, partly reflecting a AUD 815 million impairment charge on the Group's investments in two Asian associates (Malaysia and Indonesia).

Credit impairment charges increased nearly 4.3 times yoy and totalled AUD 1,674 million, of which AUD 1,031 million relate to the buildup of credit reserves in light of the deterioration in the economic outlook from the COVID-19 pandemic (62% of total credit impairment charges). These presented approximately 39% of the Group's pre-provision income of AUD 4.3 billion in H1 2020, compared to 8% in H1 2019. ANZ's cost of risk in H1 2020 increased to 53 bps, from 13 bps in H1 2019 and H2 2019.

In relation to the implementation of COVID-19 relief measures, the Commonwealth of Australia's key fiscal measures include a "JobKeeper wage subsidy" to enable corporates to retain staff on lower hours, as well as a guarantee program for SMEs up to AUD 40 billion. In this context, the Group disclosed that approximately 105,000 home loan repayment deferral requests have been submitted in Australia (AUD 36 billion) and c. 19,000 in New Zealand (NZD 12 billion). On the commercial side, ANZ has provided payment deferrals on AUD 7.5 billion of business loans. Gross impaired assets increased 22% yoy albeit the gross impaired loans ratio (including the loans 90+ DPD and restructured) remains low at 0.94%.

The Group reported an APRA Common Equity Tier 1 (CET1) ratio of 10.76% at end-H1 2020, down from 11.36% at end-FY19, as organic capital generation was outweighed by the FY19 dividend payment and growth in RWAs, relating to institutional and markets divisions. In light of the uncertainty surrounding economic activity due to the COVID-19 crisis, and even though APRA has announced a temporary relaxation with regards to the 10.5% ‘unquestionably strong’ CET1 benchmark, ANZ has decided to defer its 2020 interim dividend.

Under DBRS Morningstar's moderate macro-economic scenario ("Global Macroeconomic Scenarios: Implications for Credit Ratings", published on 16 April 2020), GDP growth in Australia falls -4.5% in 2020, with a 4% rebound in 2021 and 2.5% in 2022, while the average unemployment is estimated at 9% in 2020, 8% in 2021, and 6.5% in 2020. As a result, we expect the economic effects resulting from the coronavirus pandemic will likely translate in 2020 into weaker lending growth, lower fees and commissions as well as higher loan loss provisions. Nevertheless, DBRS Morningstar also considers that ANZ´s strong underlying profitability, and solid asset quality metrics should help to mitigate some of the negative impact of this crisis on its credit fundamentals.