ANZ Group Holdings Limited (ANZ) Earnings Call Transcript

Thank you for standing by, and welcome to the ANZ 3Q '26 Trading Update. [Operator Instructions] I would now like to hand the conference over to Kylie Bundrock, GGM, Investor Relations and M&A. Please go ahead.

Thank you, Harmony, and good morning, everyone, and thank you for joining ANZ's Third Quarter 2026 update. I'm Kylie Bundrock, ANZ's Group General Manager. On behalf of the ANZ team, I would like to acknowledge the traditional custodians of the land on which we lead this meeting today, the Wurundjeri people, and recognize their continuing connection to land, waters and community. I pay my respects to elders past and present and to the Aboriginal and Torres Strait Islander peoples joining us today. Our CFO, Farhan Faruqui, is having a call this quarter to give you some additional context and provide you with an opportunity to ask questions. We will limit it to one question per person in the interest of time. I'll now hand over to Farhan.

Thank you, Kylie, and good morning, everyone, and thank you for joining. Our third quarter performance reflects momentum building across our businesses and continued execution against our 5 immediate priorities. Our new leadership team is driving our cultural reset. We are continuing to progress the integration of Suncorp Bank and delivery of the ANZ single customer front end and are on track to meet our completion time lines. Our work to reduce duplication and simplify the bank is on track, and we remain focused on improving nonfinancial risk management and are on track to deliver the activities in our root cause remediation plan. With that, in the quarter, our cash profit increased 1% on the quarterly average of the first half 2026. The quarter 3 return on tangible equity of 11.54% and cost-to-income ratio of 49.66% continue to track to our ANZ 2030 targets. The quarter was impacted by an expense provision of NZD 125 million relating to a high court ruling in New Zealand. We had flagged this in May and have since appealed the decision. Excluding this impact, cash profit increased 5% versus the first half quarterly average. FX translation continued to impact this quarter, but at a profit before provision level, the net FX impact was largely neutralized by our FX hedging strategy. My comments this morning on the quarter will be on a constant currency basis to better reflect underlying performance versus the first half quarterly average. During the quarter, revenue increased 1% with net interest income ex Markets up 3%, reflecting growth in business volume and an increase in net interest margin. This more than offset reductions in Markets income and other operating income. Business and Private Bank and Australia Retail both delivered strong net interest income outcomes with higher net interest margins and volumes. Net interest income in New Zealand division and Institutional ex Markets were both down slightly, reflecting a disciplined approach to growth in competitive pricing environments. Markets delivered another quarter of income above $500 million. The reduction versus first half quarterly average was driven primarily by reduced client activity in commodities. Other operating income, excluding Markets, was down, driven by timing, seasonality and pricing-related impacts. This quarter-on-quarter variability is not unusual. However, compared to the third quarter last year, other operating income ex Markets increased 2%. Group NIM increased 1 basis point in the quarter. But notably, NIM ex Markets increased 4 basis points. Key factors driving the increase in Group NIM included higher replicating portfolio earnings and improved deposit margins in a higher interest rate environment. At the first half results, we had indicated a 7 basis points tailwind in our replicating portfolio over the next 12 to 18 months. We realized 4 basis points in this quarter, and we expect our replicating portfolio to continue to be a tailwind over the next 12 months or so. Now, these benefits were partially offset by competition impacting asset margins and asset and funding mix. We expect some of these headwinds to continue in the fourth quarter. On the balance sheet, customer deposits increased 2% with growth in Business and Private Bank, New Zealand and Institutional. Deposits were stable in Australia Retail with June seasonality. Lending increased 3%. Business and Private Bank delivered strong loan growth of 4% with June marking a record month. Institutional lending ex Markets grew 2% in the quarter, and Australia Retail lending also grew 2% with Housing lending returning to system growth in the quarter. Now, there has been a lot of recent market commentary around home lending. In that context, ANZ's mortgage application value in the third quarter was flat quarter-on-quarter, supported by our participation in the First Home Buyers Guarantee Scheme from late March. Excluding the impact of the scheme, application value declined 5% quarter-on-quarter and 12% since the changes in May. While system credit growth is moderating, we continue to expect to grow at or around system in second half '26 as previously signaled. Having said this, I want to be clear, our ANZ 2030 strategy is not over-indexed on mortgages. While mortgages remain an important relationship product, ANZ 2030 is focused on growing everyday banking to deepen customer relationships, supported by ANZ's distinctive and well-diversified portfolio. On expenses, as noted, the New Zealand provision impacted expenses this quarter. Excluding the New Zealand provision, third quarter expenses were down 1%, demonstrating continued progress against our productivity agenda and keeping us on track to deliver $875 million in gross cost savings in FY '26. At the first half results, we provided FY '26 expense guidance of approximately 5% lower than our full year '25 cost base of $11.85 billion, excluding significant items. We are maintaining this guidance while absorbing both the New Zealand provision and the impact of full ownership of our merchant acquiring business. Now, turning to credit quality. On an annualized basis, our CIC charge for the quarter was 5 basis points. This included an IP charge of 3 basis points, reflecting the continued strength of our portfolio. A 2 basis points collective provision charge of $37 million increased our collective provision balance to $4.48 billion, approximately $2 billion above our base case ECL scenario and providing a collective provision coverage ratio of 1.2%. Greater than 90 days past due housing loan exposures increased slightly in both Australia and New Zealand, but remained below levels seen this time last year. Group nonperforming exposures remained stable at 55 basis points of total committed exposure, and Group watch and control list exposures reduced over the quarter, while industry sector composition in that portfolio remained broadly stable. Overall, portfolio performance remains in line with the experience of the past 5 years, and we continue to be well provided. But we remain in an uncertain environment and continue to closely monitor geopolitical and macroeconomic conditions, particularly their impact on our domestic markets of Australia and New Zealand. Turning to capital, our Level 2 CET1 ratio increased 12 basis points to 12.51%. 40 basis points of capital was generated from cash profit, partially offset primarily by 3 items: growth in underlying credit RWA, data and methodology changes and IRRBB RWA, predominantly due to additional hedging of the replicating portfolio. Capital flow adjustment provided a small benefit in the quarter. We maintain a resilient balance sheet with a strong capital, funding and liquidity position. To conclude, the momentum we have built in the first half continues to strengthen. We are becoming a simpler, more efficient organization with disciplined execution. And we are investing in our segment propositions, channels, customer experience and transaction banking in line with our ANZ 2030 strategy. I'll now turn to your questions.

[Operator Instructions] Your first question comes from Ed Henning from CLSA.

Just on the New Zealand cost of the class action, you said you've absorbed it in guidance this year. Have you stopped any spend this year that it will then kind of go forward that you'll need to spend next year? Or should we think about the second half number of costs that's where it's going to grow for next year and you haven't held anything back to hit your guidance this year for that 5%?

No. Thanks, Ed, for that question. No, we haven't held back anything. One of the reasons why we were able to absorb that cost is because we've had some additional FX benefits in our expenses, which partially offset the NZD 125 million impact from the class action. There's also continued cost control that is helping us just in terms of managing our costs well and managing third-party spend, managing any uplift. So we haven't actually stopped doing anything. We are simply managing within our current envelope and ensuring that we absorb this cost.

Your next question comes from Tom Strong from Citi.

I just had a question on the balances at Suncorp. I mean they were down 1% in the quarter despite that channel has been quite price competitive. Can you just talk to what you're seeing behaviorally in terms of your Suncorp customers as we approach the migration over the next 12 months?

Thank you for that, Tom. Look, I don't -- there's nothing particularly to call out from the Suncorp Bank perspective. Obviously, Suncorp Bank is being thoughtful around managing volume and returns in terms of the home loan portfolio. We haven't seen any customer attrition of note that we should call out. And of course, there's been a slight reduction in deposits over the quarter, but that's largely been on the back of treasury term deposits being repaid and being replaced by cheaper wholesale funding, but not particularly any underlying client activity that led to that. So we feel pretty comfortable with where we are right now. Of course, we continue to monitor that as we get closer to year end.

Your next question comes from Andrew Triggs from JPMorgan.

Just a question on the underlying NIM. So just to clarify that it doesn't include any liquids tailwind in that plus 4? And also just related to the underlying NIM, deposit growth really just came from Markets, the Markets franchise in the period. Australian Retail deposits were flat quarter-on-quarter. Can you just talk to that, whether that's, I guess, a sustainable strategy in the longer term? And when would you expect to sort of pick up your growth within the Australian Retail and business deposit framework?

So I just want to clarify. The Australia retail third quarter flatness in deposits is actually reasonably seasonal. And typically, what we see is that Australian household deposits remain reasonably stable to slightly down, and there's a shift towards Business and Private Bank deposits, which did see growth in the quarter. If you look at Institutional, the Institutional ex Markets deposits sort of decreased on an end-of-period basis on a quarter-on-quarter. But from an average perspective, they continue to grow. Average operational volumes were up quarter-on-quarter by about 1% and over the quarter are up 8% versus the first half average and above -- and about 13% versus the prior comparable quarterly average. So the deposit trends are actually pretty positive. The average deposit trends in Institutional ex Markets are positive. End of period, there were some deposit movements that influenced the outcome. But overall, we feel pretty good in terms of the direction of our PCM business in Institutional. And markets really didn't have a NIM drag, so to speak, because the Markets denominator, the underlying volumes grew pretty much in line with the rest of the Group. It's just that the Markets income was much more reflected in other operating income versus NII. So overall, that had a bit of a drag, but not because of market volumes. Liquids, to your point, had no impact in this quarter.

Your next question comes from Jonathan Mott from Barrenjoey.

I just wanted to clarify one of the comments I think you made. You said that at the half, you thought the replicating portfolio was going to give you about 7 basis points tailwind. And I think you mentioned about 4 of that was achieved. Just clarifying that was correct. I got that right. Does that also imply there's only 3 basis points left to go and effectively, most of the benefit of the replicating portfolio to the NIM is already embedded in the number?

Yes. So look, I think -- so you're right in general, Jon. I think the replicating portfolio did deliver the 4 basis points of the 7 basis points we had called out. The reason, of course, for that is just the fact that we had a concentration of low rate hedges effectively rolling off in this particular quarter. And therefore, by getting invested at a higher rate, they delivered a higher NIM outcome. That impact will moderate or -- and the remaining 3 basis points or thereabouts will be delivered more progressively over the course of the next 12 months. So we still believe that there's an underlying tailwind in replicating, but not to the extent that we've seen certainly in this quarter and what we've seen over the last 12 to 18 months.

Your next question comes from Brian Johnson from MST.

Fahan, just if we have a look at it, we're sitting mid-August. We can see that you're growing at system probably a little bit above if your applications are down 12%. I'm just wondering, growing back at housing system in a market environment where we see crazy competition with the replicating portfolio to fade, is this suggesting that the NIM actually falls from this point? That it's already...

Brian, thanks for that question. Look, I think -- so the fourth quarter housing drawdowns are largely locked in because they were originated sort of in the third quarter. So they're not being impacted. Now we have also seen rising competition, to be fair, to your point, on mortgage lending over the last couple of months. So yes, there would be some impact that will flow through, but it's not -- but we think we have offsetting tailwinds as well. So we'll have to see ultimately where it lands. But overall, as I had said in the first half guidance, our second half NIM has a bias to the upside, and we continue to maintain that position.

So can I just go back on that, Farhan. But in the month of July, is that core NIM, because you've got the data now, is it up or down now that you're growing back at system housing?

So core NIM is -- well, it depends on which segment. In certain segments, it's sort of flat and stable. And in Housing, I would argue that it is down a little bit. But as I said, we also have the compensating tailwinds on the deposits. So hard to give you a sense of where we will land, particularly in the fourth quarter. But overall, we still expect second half to be supportive to margin.

Your next question comes from Richard Wiles from Morgan Stanley.