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Preliminary Final Report/Media Release/Financial Statements

Document date:  Thu 25 Oct 2001
Published:  Thu 25 Oct 2001 11:25:18
Document No:  182866
Document part:  G
Market Flag:  Y
Classification:  Preliminary Final Report , Full Year Accounts , Dividend Record Date , Dividend Pay Date , Dividend Rate

AUSTRALIA AND NEW ZEALAND BANKING GROUP       2001-10-25  ASX-SIGNAL-G

HOMEX - Melbourne                                                     

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CHIEF FINANCIAL OFFICER'S REVIEW

OVERVIEW

Australia and New Zealand Banking Group Limited (ANZ) recorded a
profit after tax, of $1,870 million for the year ended 30 September
2001. Earnings per ordinary share were 117.4 cents, an increase of
10%. Return on ordinary shareholders' equity was 20.2%, achieving our
target of above 20% for the first time in 20 years.

The Group's continuing operations recorded a profit $1,882 million,
up 18% over the September 2000 year. The Group's divestment of the
Grindlays businesses in 2000 has allowed management to focus on
growing the core banking franchises in Australia and New Zealand and
to explore opportunities in significant trading areas of Asia and the
Pacific region. On 8 October 2001, the Group announced the purchase
from Bank of Hawaii of operations in PNG, Fiji and Vanuatu, subject
to regulatory approval.

Balance sheet growth has been deliberately constrained by limiting
growth in corporate lending to focus more on fee income and by
securitisation of mortgage assets

Income from continuing operations grew 11%. Despite salary rises and
general price rises in the order of 3% to 4%, costs were flat after
deducting GST ($52 million), expenses incurred by new acquisitions
($24 million) and the effect of the exchange rate movements ($33
million)

The cost income ratio from the continuing operations reduced to 48.4%
from 51.8%, reflecting income growth and the results of our
continuing focus on efficiency initiatives. This result represents
further progress towards the Group's aim of a cost income ratio in
the mid 40's.

Whilst payments and processing systems were not interrupted by the
terrorist attacks in the USA on 11 September 2001, the credit outlook
for specific industry segments of the Group's loan portfolio has been
adversely impacted. As a result an additional economic loss provision
(ELP) of $41 million has been charged in the second half in response
to the estimated impact on the Group's risk grade profile which is
used to derive ELP.

During the year, there were a number of high profile corporate
failures in Australia, with new specific provisions of $153 million
attributed to two corporate accounts. The Group has made prudent
specific provisions for the potential losses from corporate failures.

Profit after tax benefited by $36 million from the 2% drop in the
Australian corporate tax rate.

The following commentary compares the results of continuing
operations in the current half-year with the March 2001 half-year
(refer table on page 2).

INCOME

Net interest income at $1,945 million was 5% higher, through volume
growth, with overall net margin stable.

Non-interest income grew by 5% to $1,350 million. Fee income grew by
6%, continuing the growth achieved in the first half. Other income
was 3% higher, with increases in life insurance margin on services
operating income, and in income from hedging activities, offset by
the absence of several one-off items in the first half.

EXPENSES

Operating expenses were well contained, being flat after deducting
the $4 million increase in costs from our acquisition of Amerika
Samoa Bank, start up operations in East Timor and exchange rate
impacts. This reflected the continuing success of our cost management
and restructuring initiatives. Our focus is on continuing to reduce
the cost income ratio to the mid 40's within two years, whilst
selectively investing for growth.

RESTRUCTUING INITIATIVES

Significant infrastructure and technology projects are underway
across the Group. These projects generally deliver efficiencies of
operation and in some cases also enhance income generating
capabilities. Restructuring costs arising as a result of these
projects are taken against the provision raised at September 2000.
Usage against this provision in the current half year was $117
million ($65 million first half). In addition, normal restructuring
activities resulted in a charge to profit of $42 million ($43 million
first half). Progress on projects includes:

* the focus on branch reconfiguration has been slower than expected,
as the Group rebalances its focus on cost reduction with an
increasing emphasis on revenue growth and customer service through
transforming the branch environment as a strategic asset

* progress on our new sales and service platform continues

* the roll-out of chip enabled EFTPOS devices and write off of
existing terminals

* Esanda back office processes are progressively moving towards web
based platforms and the business finance stream has been restructured

* re-configuration of sales platforms in the Asia and Pacific 
businesses, with operational enhancements to credit approval and 
review processes

* outsourcing of trade back office processing to a joint venture 
operation, giving significant efficiencies and greater customer 
functionality

* the decommissioning of legacy IT platforms, workflow improvements, 
the replacement of the older transaction processing systems and 
hardware upgrades are on schedule. The rollout of the Common 
Administration Systems platform has commenced with the technical 
infrastructure, phase 1 of the Human Resources module and the 
Procurement, Accounts Payable and Fixed Assets modules already 
implemented. Further phases (the rollout of the General Ledger 
replacement and Human Resources phase 2) are on schedule for 
implementation during next financial year

* write off of surplus lease space, fitout and other assets

The benefits of this extensive restructuring program will emerge 
progressively, but principally in 2002 and beyond. These savings will 
be used to maintain our philosophy of cost control and to enable 
investment in growth options, whilst achieving our target of a mid 
40's cost income ratio.

RISK

The Group provision for doubtful debts in the second half was $290
million, compared with $241 million in the first half. The increase
in the economic loss provisioning in the second half reflected a
somewhat harsher economic environment, but principally the assessed
impact on credit outlook of the terrorist attacks in the USA. Given
the close proximity of the terrorist attacks to balance date, the
Group has conducted an analysis that estimates the potential impact
on economic loss provisioning. The analysis notionally downgraded, by
one credit risk rating, all exposures to the tourism, airline and
insurance industries, and exposures to the Middle East. All other
loan assets were notionally given a 10% increase in their expected
default frequency. The changed rating profile has resulted in an
additional charge of $41 million, which was recognised centrally
because of the close proximity to balance date. Risk profiles
continue to be closely monitored.

Net specific provision were $339 million, up from $181 million in the
first half. Tightening credit conditions were also evident in the
consumer portfolio and Asset Based Finance. Net non-accrual loans
increased from $727 million at March 2001 to $770 million at
September 2001. Gross non-accrual loans and specific provision
balances fell due to significant write-offs and the sale of
non-accrual portfolios. The general provision balance at September
2000 was $1,386 million, compared with $1,460 million at March 2001.

The Group continues to re-balance its lending portfolio, with
consumer lending in Australia and New Zealand moving from 52% of net
advances in September 2000 to 55% at 30 September 2001. Single
customer concentration limits continue to be set well below APRA
guidelines and were reduced between 20% and 40% during the half.
These broad portfolio measures, together with the focus on lowering
the risk in the portfolio and industry diversification across
corporate lending (refer page 58), should place the Group in a sound
position in the harsher economic conditions that are expected.

DISCONTINUED BUSINESSES

Discontinued businesses comprise principally residual assets from the
Grindlays operations sold on 31 July 2000 and the joint venture with
OCBC Bank discontinued in March 2001. These businesses broke even in
the second half, compared with a loss of $12 million in the March
2001 half-year.

SECURITISATION OF ASSETS

During the current half-year, $1.97 billion (USD $1 billion) mortgage 
assets were securitised through an issue into the global market. The 
issue was three times over-subscribed. ANZ retains responsibility for 
the servicing and management of the loans.

CAPITAL MANAGEMENT

Inner Tier 1 and Tier 1 ratios have been maintained at levels similar
to those at September 2000. The ratios were managed down in the first
half of 2001 through the share buy-back program, the final part of
which was completed in May 2001. Both ratios showed a small increase
in the second half, to 6.4% and 7.5% respectively. the long term
target for Inner Tier 1 remains at 6.0%. The Group's total capital
adequacy ratio remains strong at 10.3%.

The Group is managed to maximise value for our shareholders. One
measure of shareholder value is EVA(TM) (Economic Value Added) growth
relative to prior periods. EVA(TM) for the half-year ended 30
September 2001 was $681 million, up from $594 million for the
half-year ended 31 March 2001.

EVA(TM) is a measure of risk adjusted accounting profit. It is based
on operating profit after tax, adjusted for one-off items, the cost
of capital, imputation credits and economic capital at a rate of 11%.

At ANZ, economic capital is the equity allocated according to a 
business unit's inherent risk profile. It is allocated for several 
risk categories including: credit risk, operating risk, interest rate 
risk, basis risk, mismatch risk, investment risk, trading risk and 
other risk. The methodology used to allocated capital to business 
units for risk is designed to help drive appropriate risk management 
strategies throughout the Group.

EVA(TM) is a key measure for evaluating business unit performance and 
correspondingly is a key factor in determining the variable component 
of remuneration packages. business unit results are equity 
standardised, by eliminating the impact of earnings on each business 
unit's book capital and attributing earnings on the business unit's 
risk adjusted or economic capital.

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