Interim Results 2006 Australia and New Zealand Banking Group Ltd. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

UNIDENTIFIED COMPANY REPRESENTATIVE: Good morning everybody and welcome to our 2006 interim results. A special welcome also to those joining us in Melbourne, in Wellington where we have Graham Hodges and his team and also those joining on the phone and on the web.

As usual with these briefings, John will start off giving his take on the results and a few of the highlights, peter will then go through the detail and then we'll open it up to question and answers. So John.

JOHN MACFARLANE, CEO, AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED: Well thank you Steve and good morning everyone. Thank you for attending our results. I realize for those of you in Sydney you've had to drag yourself away from fashion week, but we hope that at least we'll provide you with some interest this morning.

Now, most of you have known me for some time and you know I'm normally pretty cautious about commenting on results, or predicting results. However, I think it's pretty fair to say that I'm particularly happy with this result and with the outlook for the year as a whole. It does begin to show, though, we've had many years of hard work and investment that we undertook at ANZ, much against the trend of the industry. Firstly, we adopted specialization; we then invested in our customer infrastructure when the conventional wisdom was to harvest, and finally by beginning an investment in our people, in our culture that's now frankly very difficult for anyone to replicate.

Now before I hand over to Peter, who will take you through the results in his normal erudite manner, let me summarize the key numbers. Statutory profit up 1811, up 16% and then on any other measure, the underlying profits up 10% across the board. Cash profit actually up 10 in the year, but also 9% in the half. And even cash profit before provisions up 10 and 5% on the half. We were very pleased that our revenue growth and expense growth came bang in line with our targets; revenue growth at 8%; expense growth at 6%. Obviously, with such a strong result behind us in the half, you'll have no doubt worked out by now that it would be very difficult for us to come up with anything short of a very good outcome for the year as a whole. So I'm pretty confident that we'll look back and see that 2006 was a good year for ANZ.

Now, turning to the individual divisions. ANZ is now a very large company and the important thing is to get the big things right. And in this result we got the big things right; we got the big divisions performing well. Firstly, personal was up 16%; I remember the beginning of this and what a difference. We needed to change; things were going badly for banking in Australia; banks were hated by the community, and there was really no difference between the offerings of the bank. We needed to change; we recognized that. And then we invested against the trend. In the last 12 months ANZ has added 400,000 accounts in Australia in the personal banking area, which is an immense achievement.

Institutional business; it's been a tough market for institutional. Institutional is up 8%; this is a pretty good outcome, but that's after years and years of de-risking that business that's now finally ended. And Steve has transitioned very successfully in getting traction on his new business model in that area. Of course we're delighted to see New Zealand bounce off the bottom after two relatively flat years, and we're getting good momentum across the board in New Zealand, including the ANZ retail brand which is also up. That's New Zealand business we're showing there, up 14%, but the New Zealand geography was up 15% as a whole including the institutional business.

Our corporate business was up 16%, strong business banking, strong SME and a relatively flat corporate business. We've now integrated that with the institutional business and in the hope that we get more traction between the product and the customer groups. Corporate underlying was up 7% pre-provisioning which is probably slightly lower than the others.

One of the disappointing things in terms of the business mix here is Esanda which has had a great run over the last few years, but things have changed there in the external environment, but also we've recognized that we need to tighten up the management of that business. We've set it in a new direction in two ways. One, I've always worried about Esanda being stuck out on its own, not leveraging the rest of the Group. And so we've brought it inside now and given it the whole customer base of the bank to leverage. At the same time we also want to use the Esanda brand across all of our consumer finance products, not just order finance and equipment finance. So that's quite a difference in that area.

And at the same time when you add it up including the retention of the order finance business and the equipment finance business, we're one of the few people in Australia that can actually compete pretty much head on in consumer finance with GE almost across the board. It also suffered a little bit because of oil prices which affected asset values.

Now Asia Pacific is actually performing incredibly strongly and at 18% and 46 million you're only seeing part of the story here. Asia Pacific geographically is much bigger; it includes institutional business and was up 25% pre-provisioning on the geographic basis. So it's been very strong. But actually the result was held back by the level of investment that we've been making over the year in Asia. The staff increased geographically, up 8% in Asia and in fact expenses were up 20% geographically in Asia. So in other words, it's really -- it's understating the true underlying effect of that business. So all in all, the big things were right here.

Now, some years ago we did announce what our strategy was and, essentially, we've consistently stuck to the strategy that we said that we would have. Firstly we will work towards consolidating and building our position in Australia; secondly we want to dominate the financial scene in New Zealand and benefit from the investment we made in the National Bank of New Zealand. And then later on create some options now for Asia that should produce returns over the long run. And we're getting pretty good traction on that agenda; we're delivering on it; we're not changing it; that is our strategy and it's very clear. We're winning shares in Australia; we've got good earnings momentum here; we're leading in customer satisfaction on the major banks; we've got very good staff engagement, not just in banking, but across all the major companies in Australia, and we're consistently investing for tomorrow in that business. And so in the near term we should be looking towards Australia to produce pretty solid results for us.

We spent a lot of money in New Zealand buying the National Bank of New Zealand; we've had two flat years; we're now, from next year onwards, looking for a pretty strong return from that level of investment; the restructuring period is over; we're starting to get the benefit. We're also starting to operate normally without the distraction of the restructuring, and it was good to see the improved results in this half from New Zealand.

Over the longer run, we're building a portfolio of relatively low risk Asian investments where we can add value. There's a time for everything. Now's not necessarily the time to splurge lots of money buying things in Asia; things are reasonably hot out there. We'll get our opportunity; we have been very careful about the rate of investment that we've been making. We've been also very careful about doing the right things in Asia. So it's not -- although it's superficially a great opportunity to rush in, we've been very considerate about it because this is a long range, post 2010 investment that we're making and we want to get it right. Because Asia, notwithstanding its excitement, it's also a difficult place to operate. So that's the strategy; is near term Australia and New Zealand, further term an increase in our position in Asia.

Now, a few years ago I told you that we'd make ANZ a very different bank. This has been the right agenda for the corporation, but frankly I'd admit it's been a lot tougher than I thought it was going to be at the outset. However, this year I've got the feeling that we're starting to see this traction coming through; we're beginning to see ANZ changing the face of banking in Australia and New Zealand, particularly in the personal banking arena.

And over those years we've invested against the trend. Rather than restructuring the business harvesting to create the higher short term profits, we've actually lowered our profits to make an investment, to create something that others will find very difficult to get the same momentum quickly on and to replicate. We began an unusual journey to value people first and then create the high staff engagement of any ANZ -- ASX listed company. We've added around 4,000 people over the last three years to serve our customers while others were cutting. We opened and refurbished; we've re-staffed our branches while others were closing; we took a different route on wealth management, which is very controversial; we invested in Asia at a time the market considered unfashionable, and we chose the difficult issue surrounding banking and money as the focus of our community activities.

Look, it's early days on this agenda, but I believe that the result is starting to show that the focus on these stakeholder matters really is beginning to pay off. And the belief that if we get motivated staff and enlightened values, that's going to lead to satisfied customers which together with a strong engagement in the community is going to create performance growth and, more importantly, sustainability of returns for shareholders going forward.

Business is not an event; it's a journey; it's something that takes time. And we're not finished, there's still a great deal to be done here at ANZ, so we're not claiming victory with a good set of results. Over the years ahead we still need to work hard on building the momentum in the personal, institutional and New Zealand divisions. We really intend to bring our cost income ratio to 40 or below which I'm confident that we'll do and grow our revenues at the same time and we've knocked 1% off our underlying cost income ratio in this result alone.

We're going to continue to advance our strategic agendas on growth, but also on transformation and ultimately to secure our position in the minds of all our stakeholders that ANZ is a very different bank. And as a management team, we're all very energized around what we believe is an exciting agenda. Anyway enough from me for the moment and I'll now pass you to Peter who will take you through the detail of the result in a very unusual and typical Peter Marriott way.

PETER MARRIOTT, CFO, AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED: Thanks, I think. Yes, thanks John. First of all, of course, this is the first time that I've stood before you presenting IFRS results and I'm sure, over the last three days or so you've been somewhat overdosed on IFRS. And I think the key messages though which come out of these documents is that, in the end, the impact is not large. It's had a trivial impact on our capital and it really had a trivial impact on the P&L once you get things onto a fully comparable basis.

So we've gone out of our way in this document recognizing that it contains essentially two pieces. There's the statutory P&Ls and balance sheet details between pages 61 and 116 that have to be presented on this apples and oranges basis as I'm showing on that slide, so that's the legal requirement. But we've gone out of our way throughout the rest of the presentation document to try and present things on a fully comparable IFRS basis, which indeed, the only numbers that we actually recognize, because we've been running the bank on that basis ever since October 1. So that will at least make sure that all of the numbers are consistently not picking up any variations simply because of a change in accounting policy.

So I stress in particular for those of you trying to navigate through 120 pages of documents, do not look at the average balance sheet in the legal part, look at the average balance sheet at the rear of the document, which is the one which is fully translated otherwise you'll think margins have done really, really strange things because you're looking at incompatible financial statements.

At the bottom line, as I said also, you'll have seen it's had, essentially from a P&L point of view for 2005 comparatives when we gave you the revised numbers which were only trivially different to the numbers we gave you back at the end of 2005, the only real impact on earnings per share was recognition of share based payments. An inclusion of those was the cause of the slight reduction in our overall earnings per share. And as I said before, very little impact on capital and hasn't really impacted on the P&L trends once you get things into a fully comparable basis.

So with that background I'm now going to be principally talking about apples and apples in the rest of the presentation. As John said at the outset, obviously the headline number is extremely strong and it's particularly been boosted along by that little box in the top right-hand corner there which is our recovery of what was in total $114 million from the insurers as a result of our loss on National Housing back many, many years ago which we thought out of a policy cover of 130 million that was a fairly good outcome. And there's 113 million of that included in the current year and there was about 0.9 that we'd received from some insurers last year.

So that was what sort of kicked the result up from an underlying result, which was this 10.4% growth in cash profit, measured on a comparable IFRS basis, and our cash earnings per share being up by 9.7. And also one of the little other things in there is you see that we're back above, sorry back bang on 20% ROE after the NBNZ acquisition taking us back down now this period the ROE was 20%.

Drilling down into that, clearly I think the highlight of this 12 month period has been the strength in income. We set ourselves out to hit a goal of 7 to 9% and to lift our income growth and at 8.4% across the PCP period that's been very strong. And that's been the clear highlight. Continuing levels of investment, the 6.2, but really the 6.2% growth in cost there is a much faster growth last year in the second half of 2005, and only about 2% growth in this half, bringing it down to an overall 6.2. And as John said before, we've been seeing our cost to income ratio come down.

Then it's worthwhile pausing on provisions and tax because there's some interesting trends there. You look at the provision line and some of your reactions might be, the result's been boosted by provisions. But interestingly enough, to the extent provisions have been less than say a basic 10% balance sheet growth, that's exactly offset by the increase in the tax rate. As you see there, that's why profit before provisions growth and cash earnings per share growth -- sorry cash profit per growth I should say, are both up by 10.4. So, yes, provisioning is cyclical, but to the extent there was any benefit there it's offset by the higher tax rate from the runoff of structured financing deals. So certainly we've put a lot of focus internally on the profit before provisions growth, and that's been a very pleasing aspect of this year's result.

Then of course we're principally focusing here on PCP, but it's important to see what's happening with the underlying momentum in the first half. Historically of course bank first halves are weaker; we have one less day so that's 0.5% in its own right and tends to be a slowdown over December and January. But our profit before provisions growth in the half was 4.9. So the continuing momentum, even though you'd expect it be a little bit slower. So I think the signs there were positive.

Looking on interest; it's a complex story. The different businesses have done better than others from an interest margin point of view. Overall the margin continues to come down at much the same rate as we've seen over the last couple of years in fact. And that's been a pattern though within the …