The pace of wage growth is so meagre it is likely to curb future growth across the banking industry, as regulators act to prevent a further blowout in household indebtedness, ANZ Bank has warned.
ANZ’s chief executive Shayne Elliott on Tuesday warned soft wage growth was an important economic risk on the horizon, as the lender delivered a $3.4 billion interim profit that left investors underwhelmed.
ANZ Bank first half profit
ANZ Bank’s profit increased 23 per cent in first half to $3.4 billion.
Shares in all of the big four lenders slumped, after the first earnings result in this round of bank profits suggested the revenue outlook remains challenging, as regulators put the brakes on the home loan market.
With pay packets growing more slowly than inflation, Mr Elliott said more households were at risk of falling into mortgage stress. If households respond to a squeeze on their budgets by cutting their discretionary spending, it could also hurt the bank’s business customers.
ANZ chief Shayne Elliott said the combination of low wage growth and rising household debt was unsustainable. Photo: Ben Rushton
“When many people buy a house, they assume that they will be getting some sort of wage growth over time, and they bake that into their own personal assessment of their ability to borrow,” Mr Elliott said.
“If they’re disappointed on that front, that potentially can cause them some stress, particularly when you’re looking at cost of living increases.”
While loan losses are still at very low levels, the comments highlight the softer growth outlook for the industry. Regulators are forcing lenders to put the brakes on riskier lending in the $1.5 trillion home loan market, the key source of their profits.
Mark Nathan, managing partner at Arnhem Asset Management, said the prospect of slower growth was a challenge facing all banks, and it was likely to intensify competition for customers.
“It’s something that will affect the entire banking sector,” said Mr Nathan, whose fund manages about $2.5 billion.
“Credit growth will have to moderate, given the level of gearing in the consumer market. The business sector will partly offset it, but there’s not a great deal of growth in the business sector either,” Mr Nathan said.
In a sign of the slower loan growth ahead for banks, Mr Elliott said mortgage-fuelled credit growth needed to slow from 6 per cent to 5 per cent or lower because it was unsustainable for households to continue getting deeper into debt.
“Credit growth of around 6 per cent, almost exclusively driven by housing, coupled with wage growth of around 2 per cent, is not desirable or sustainable,” Mr Elliott said.
Latest figures show the wage price index expanding at a record low of just 1.8 per cent, which is lower than the inflation rate of 2.1 per cent.
In response to the slower growth, ANZ is in the midst of a restructuring that has seen the bank announce 12 asset sales since late 2015, and unleash deep cost-cutting focused on its institutional business, especially senior management positions.
In the year to March, the number of full-time equivalent staff employed by the bank fell by 2850 to 46,046. Mr Elliott told analysts costs at the bank would be “materially lower” over the coming years, due to attrition, automation, and asset sales.
The result marks an improvement compared with this time last year, when Mr Elliott used his first earnings result as chief executive to make hefty write-downs to the business and cut its dividend for the first time since the global financial crisis.
In this half ANZ left its dividend flat at 80c a share, which will be fully-franked and paid to shareholders on July 3.
Tuesday’s result showed the restructuring had lifted return on equity – a key measure of profitability – from 11.2 per cent to 12.5 per cent.
Even so, investors were disappointed by weak revenue growth, driving its shares 2.1 per cent lower to $32.35, with other major banks also being sold off.
Despite the rebound in profitability, analysts pointed to the weak interest income, which fell 2 per cent, as the banks’ profit margins were crunched by competition for loans.
Citi analyst Craig Williams said there would be some “disappointment” in the market after a recent rally in ANZ shares, as revenue growth remained weak.
“While ANZ’s restructure remains on track in our view, the ride will be bumpier than many investors expect,” Mr Williams said.
In the six months to March, ANZ benefited from a sharp improvement in charges for bad and doubtful debts in its institutional arm, and Mr Elliott said he expected credit quality to be “broadly neutral” in the second half.
The economy had also coped with the transition from a mining boom better than expected, but Mr Elliott told investors “the current concern” was how low wages could hold back the economy.
Ahead of an expected toughening in capital requirements, Mr Elliott said the bank was “very, very comfortable” with its core equity tier one capital of 10.1 per cent of assets.