The Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price is on watch after revealing a somewhat difficult third quarter of FY21.
What happened in ANZ’s third quarter?
What caught my attention from this update was what happened with ANZ’s Australian mortgage portfolio. It said that the Australian home loan balance sheet reduced by $0.3 billion in the third quarter.
There was a $16.2 billion increase in lending (lower than the quarter averages of the first half of FY21 and the second half of FY20). It was offset by $16.5 billion in paydowns, higher than the quarter averages of $15 billion in the first half of FY21 and $14 billion in the second half of FY20.
ANZ explained that the paydown rate is higher than in prior periods, driven by an ongoing shift to principal and interest loans, as well as customers accelerating their principal reduction by increasing their offset balances and paying more than their required minimum amounts.
The bank tried to reassure investors by saying actions are underway to address elevated refinance out and improving turnaround times, including adding assessment resources, process simplification and automation.
Credit risk weighted assets (RWA) – essentially its loan book, with riskier lending (like credit cards) getting more of a weighting than lower-risk lending (like mortgages).
The bank ended the quarter with a CET1 ratio of 12.2%. The bank recently announced $1.5 billion share buyback which is expected to reduce the CET1 ratio by around 35 basis points (0.35%).
Provisions current lockdowns
Banks are getting plenty of investor attention for their provisions, adding to provisions means banks are worried by what’s going on. A release/reduction of provisions means the bank is getting more confident about the situation (and therefore perhaps higher profits, dividends).
For the third quarter, ANZ said there was a total provision released of $32 million. That was an individual provision charge of $21 million and a collective provision release of $53 million.
The third quarter annualised individual loss rate was just 1 basis point (0.01%), versus 6 basis points (0.06%) in the first half of FY21 and 13 basis points (0.13%) in the second half of FY21. ANZ isn’t seeing much losses at all.
The provision balance was $4.25 billion at 30 June 2021, with a collective provision rate of 1.24%.
In the current lockdowns, ANZ said that its Australian home loan is seeing deferrals on around 1,300 loans (amounting to $600 million of a total of $280 billion of loans. That’s 0.2% of the portfolio, according to ANZ).
Summary thoughts on ANZ and the share price
With a booming property market, it is a bit concerning to see ANZ’s Australian home loan balance decrease. It’s a cheap bank on valuation grounds (compared to others like Commonwealth Bank of Australia (ASX: CBA), but may not be the best option for long-term growth. There are other ASX dividend shares I have my eyes on.
