Low interest rates not only help banks sell more loans, say for housing, but they also mean (if credit screening procedures are right) lower bad debts because fewer customers are under pressure.
But a low interest rate environment can also produce a misleading picture if not carefully handled. It is not an earnings bonanza for profit machines like banks, for example.
So it shouldn’t be such a surprise that the current record low interest rate regime from the Reserve Bank saw the ANZ produce a surge in profit in the six months to March 31, despite a fall in interest income.
But don’t be foooled by the apparent strong profit rebound – it is and it isn’t.
Thanks to a sharp drop in bad debts and impairments, the bank said interim earnings jumped 23% to $3.4 billion.
That’s because fewer customers are in trouble and the pressure has eased in the mining sector (a worrying area of business for the ANZ) as commodity prices surged in late 2016, producing a rise in revenue and profits and more business for companies in the services part of the resources sector.
But that was a bit misleading because the bottom line is still well short of the $3.68 billion earned in the March 2015 half year.
The interim results from ANZ on Tuesday morning showed that even though interest income slipped 2% in the half, charges for bad loans also fell 22%, as credit quality improved.
The bank, which has been shedding lower-returning assets to focus on its core Australian business (and raising capital to meet tougher regulatory rules), however has notlifted dividend, despite the big jump in earnings.
Interim dividend remains unchanged at 80 cents (it was cut a year ago from 86 cents in the first half of 2015-16).
The result compares with market expectations for a cash profit of $3.5 billion, with an interim dividend of 80c a share.
The unchanged dividend tells us ANZ management and directors remain wary of the outlook, especially with the housing sector so febrile.