Mortgage rivalry hurts ANZ

Strong competition in the New Zealand mortgage market - particularly from rival ASB Bank - is costing ANZ Banking Group, the company says.

Despite a strong performance by its Australian operations, ANZ was maintaining its current earnings expectations, it said.

In an update with banking analysts, ANZ Banking group chief executive John McFarlane said he was comfortable that the bank could meet market forecasts of earnings per share (EPS) growth of about 8 per cent to 8.5c EPS for the present year.

"It's been the sort of intuitive feel as to what a reasonable player should be able to achieve in these markets managing the business prudently," McFarlane said.

Chief financial officer Peter Marriott said the bank had been expecting a stronger result from New Zealand "and I suppose that's been the negative aspect for the half so far, but it's been offset by a much stronger performance in Australia".

McFarlane said the group had been focused on the complex integration of its $5.5 billion 2003 acquisition of the National Bank of New Zealand, but the BNZ-initiated mortgage war had also been a factor in the weaker performance of the New Zealand business.

McFarlane repeated comments he made this month that the interest rate margins earned by ANZ-National on home mortgages were under more pressure than he had ever seen.

Marriott said: "There's no doubt that ASB are setting the standard in terms of performance within the New Zealand marketplace."

Although some of that was a function of concentration within the strong Auckland market, "they've also been doing a very good job of getting strong volume growth out of their segment".

"That volume growth has offset that margin depression on mortgages which has been their dominant source of interest income."

Marriott said ANZ National's earnings had also been affected by a significant increase in the proportion of fixed rate lending as opposed to the more lucrative variable rate offerings and a decrease in the amount of non-interest bearing deposits.

This had resulted in "quite a significant drag on the margin for New Zealand".

McFarlane said ANZ National had also been affected by higher than expected regulatory costs associated with integration, which is expected to be completed this year.

Meanwhile, McFarlane said the bank had no plans to expand in Australia through acquisitions because at present there was nothing sensible from a relative valuation standpoint.

"We're also conscious that Australia is pretty much top of the market now and therefore we expect things to get a little weaker and some of the gloss to come off," he said.

"Having acquisitions in Australia is not on the near-term horizon for us and we're certainly not looking at anything."

ANZ would focus on increasing expenses to get market share and a higher revenue growth rate.

He said the bank was focusing on repositioning itself towards higher growth areas and moving away from lower growth areas.

"We're certainly going to reallocate resources and probably quite decisively so that investments are not going to be across the board," he said.

"We'll probably be investing disproportionately in the higher growth areas."

The bank's reporting year ends on September 30.