October 30, 2019 / 9:34 PM / 18 days ago

UPDATE 2-Australia's ANZ bank posts fall in H2 profit, expects recovery in mortgage demand

* H2 cash profit A$2.91 bln vs A$2.93 bln analyst f’cast

* Result driven by remediation charges, lower revenue

* Margins squeezed by low interest rates

* Loan applications up 30%, expects momentum for 2020

* Flat 80c dividend but lower tax rebate, shares fall 2.8% (Adds shares, analyst comment, detail on lower revenues, margins, dividend)

By Paulina Duran

SYDNEY, Oct 31 (Reuters) - Australia and New Zealand Banking Group Ltd missed market expectations for second-half profit on Thursday amid record low interest rates and tough competition for home loans, but said it expected higher mortgage demand this fiscal year.

Australia’s fourth-largest lender reported a near 3% drop in second-half cash profit to A$2.91 billion ($2 billion), driven by remediation charges, a sharp drop in revenue and an 8 basis point fall in net interest margins, a key measure of profitability.

The result marks the beginning of the banking reporting season which most analysts expect to show a second consecutive fall in full-year cash earnings.

Commonwealth Bank of Australia in August reported a second consecutive annual profit fall, and the two other majors are expected to post lower results in the coming days.

ANZ shares fell 2.8% following the result, which analysts described as “weak”, while the broader market was 0.13 lower.

Cash profit from continuing operations for the six months ending Sept. 30 missed an average forecast of A$2.93 billion, according to a Reuters poll of six analysts.

Over A$2.5 billion in customer remediation expenses pressured the lender’s bottom line, as Australia’s Big Four banks continue to pay the price for wrongful practices exposed by a public inquiry into the country’s financial sector last year.

The Melbourne-based lender maintained its final dividend at A$0.80 per share but cut its franking tax rebate to 70%, likely reflecting how high customer remediation expenses are reducing the domestic tax paid, according to analysts.

Profit from continuing operations for the full year remained flat at A$6.47 billion, in line with analysts’ forecasts.

“This has been a challenging year of slow economic growth, increased competition, regulatory change and global uncertainty,” ANZ Chief Executive Officer Shayne Elliott said in a statement.

Revenue was down 5% and net interest margins were down 8 basis points, with almost two thirds of that directly due to lower interest rates, the bank said.

“The operating environment is likely to become more challenging given ultra-low rates, placing further pressure on revenue,” UBS analysts said in a note to clients.

GREEN SHOOTS

The Melbourne-based lender said home loan applications increased more than 30% during the second half but that demand had not yet flowed through to its results.

Elliott said the momentum was expected to continue into 2020 while Australian house prices recover from falls in 2018 thanks to low rates and looser lending rules.

The bank had already “seen a steady recovery in home loan applications in recent months,” Elliott said.

Despite the reported green shoots in demand, Elliott warned that low rates, international political and trade tensions, and competition would continue to impact earnings.

Competition is ramping up from smaller lenders and foreign players looking to grow their home-loan businesses, while the big banks deal with increased regulatory scrutiny following last year’s revelations of widespread misconduct.

Reporting by Paulina Duran in Sydney and Devika Syamnath in Bengaluru; Editing by Shailesh Kuber and Stephen Coates

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