ANZ bank warns of Asia volatility as cash profit rises

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Australia & New Zealand Banking Group Ltd. said bad debt charges will be higher than analysts expect in the first half amid a slowdown in Asia and increased market volatility, even after profit rose in the first quarter.

The lender expects a first-half group credit charge a little above A$800 million ($568 million), compared to the current market consensus of A$735 million,  the Melbourne-based lender said in a statement Wednesday. Unaudited cash profit, which excludes one-time items, climbed to A$1.85 billion in the three months ended Dec. 31, compared with A$1.79 billion reported a year earlier.

“Our exposure in Asia is predominately short tenor, investment grade lending nevertheless the slowdown in the region and increased market volatility are seeing credit conditions become more difficult in the second quarter,” Chief Executive Officer Shayne Elliott said in the statement. “Our business in China remains steady with the impact primarily in manufacturing and trade-exposed sectors in South-East Asia.”

This is the first earnings update for Elliott, who after taking over Jan. 1 is under pressure to turn around the lender’s Asian operations. The Asian business, part of former CEO Mike Smith’s plan to make a regional lender to compete with HSBC Holdings Plc. and Citigroup Inc., is dragging down return on equity and depressing the share price.

The group net interest margin, a key measure of profitability, declined by 2 basis points due to the markets business, the lender said.

“The ructions in financial markets likely leave ANZ in need of a major strategic reset, with its Asian super regional strategy pressured,” CLSA Ltd.’s Sydney-based analyst Brian Johnson said before the update. He said compared to its peers ANZ derives a greater proportion of its earnings from financial markets, which are in “structural decline.”