UPDATE 2-Australian banks see margin squeeze as competition heats up

Thu May 1, 2014 2:21am EDT

Related Topics

* H1 cash profit A$3.51 bln vs A$3.4 bln analysts' fcasts

* Net interest margin narrows to 2.15 pct, lowest in 6 years

* Shares fall as much as 1.8 pct after H1 results (Adds details on falling margins, comment from bank exec, analyst)

By Swati Pandey

SYDNEY, May 1 (Reuters) - Australia and New Zealand Banking Group Ltd saw half-year net interest margins drop to their lowest level in six years, in a sign that competition for low-risk mortgages could be crimping the profitability of Australia's Big Four banks.

ANZ, Australia's No. 3 lender, expects net interest margins (NIM), a key gauge of a bank's profitability, to remain largely flat but cautioned about competition putting pressure on the bank's Australia business.

NIM for the half-year to the end of March narrowed 9 basis points to 2.15 percent, its lowest point since 2008, dragged down by commercial lending and international and institutional banking businesses.

"Pretty aggressive competition for limited asset growth is seeing banks cut prices on lending more than their cost of funds is falling with margins declining. I think you will see that across all banks," said Brian Johnson, an analyst with CLSA.

To be sure, even with these competitive pressures and steadily falling interest margins Australian banks are on track for a sixth year of record profits, bolstered by low interest rates which are encouraging borrowers and shrinking costs associated with bad debt provisions.

Since the 2008 global financial crisis, mortgages and consumer businesses have generated about 35 percent to 40 percent of Australian bank earnings, making them the primary driver of profit growth for the "Big Four" - ANZ, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corp.

Record low interest rates, currently at 2.5 percent, have filtered through to higher house prices and home building while boosting household wealth and giving consumers the confidence to start spending again.

"The part of the business that is under pressure is any lending to corporations and mostly that is only in Australia," ANZ chief financial officer Shayne Elliott told reporters.

"But that's a small part of our overall business. We don't see any major decline in group NIMs in future," he added.

SHARES FALL

ANZ kicked off bank earnings on Thursday, posting 11 percent growth in half-yearly cash earnings, helped by a 43 percent jump in international and institutional banking in Asia-Pacific, Europe and the Americas.

Cash profit, a measure that excludes one-off items and is closely watched by industry analysts, was A$3.51 billion ($3.25 billion) for the period, up from A$3.18 billion a year ago and slightly better than forecasts of analysts polled by Reuters.

So far, the bank's strategy to diversify growth into other Asian markets has held it in good stead, with a big chunk of profits coming from outside Australia.

Even so, investors gave a thumbs down to the results.

ANZ shares, which have a market value of about $88 billion, fell as much as 1.8 percent in early trades. At 0442 GMT, it was down 1.3 percent at A$34.04.

"Clearly ANZ is starting to pay the price of its high-growth strategy with mining services-related impairment ticking up and capital declining 20 basis points," Mike Wiblin, head of Australian banks at Macquarie Securities Group, said in a note to clients.

"In addition, the bank had to rely on further provision releases and balance sheet 'trading' profits in order to reach consensus numbers," Wiblin said.

Westpac reports half-yearly results on Monday followed by NAB on Thursday. Market leader Commonwealth will announce results for the three months ended March on May 14.

($1 = 1.0793 Australian Dollars) (Additional reporting by Tripti Kalro in Bangalore; Editing by Stephen Coates)

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