August 19, 2011 / 1:12 AM / 8 years ago

UPDATE 2-ANZ Q3 profit near forecast; pins growth hopes on Asia

* Q3 underlying profit up 7.6 pct to A$1.4 billion

* Says group revenue hurt by challenging global markets

* Customer funding makes up 61 pct of total funding base

* Says finished wholesale fund raising for the year

* Shares fall as much as 5.6 pct

By Narayanan Somasundaram

SYDNEY, Aug 19 (Reuters) - Australia and New Zealand Banking Group (ANZ.AX) said shaky global markets will continue to hurt revenue after its underlying quarterly profit just missed forecasts, sending its shares down as much as 5.6 percent.

But Australia’s fourth-largest lender, which is trying to transform into a pan-Asian lender like HSBC (HSBA.L) and Standard Chartered (STAN.L), said it was confident of growth given its exposure to Asia and the resources sector.

ANZ said lower trading income led to a 14 percent fall in global markets income compared to the first half average. It said it expected weakness to continue in the last quarter, underscoring the challenges it faces in its Asian expansion.

“ANZ has a higher proportion of market income and that is showing its hand in their numbers in weak markets,” said Simon Bonouvrie, Portfolio Manager at Platypus Asset Management.

Citigroup analyst Craig Williams said ANZ may need to rethink is strategy towards trading and risk setting. He cut his rating on the bank to hold from buy after ANZ’s earnings.

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Australian banks in good shape:cbank [ID:nS9E7IF03U]

Australia banks face no liquidity crunch:RBA[ID:nL3E7HS01T] Asia banks face dollar funding squeeze: [ID:nL3E7J80OQ] NAB says can weather global turmoil: [ID:nL3E7J83ML] CBA warns on funding costs after record H2 [ID:nL3E7J80Q6]

Westpac shares fall on climbing bad debts [ID:nL3E7JF3KJ] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

ANZ, which has a larger exposure than most peers to the Australian resources sector, said it was confident of riding any turbulence in the global economy due to a strong balance sheet.

“The bottom line is we have the right strategy, we are in the right markets and we have steady momentum in our customer franchises which allows us to be cautiously optimistic about our prospects despite the market volatility,” ANZ Chief Executive Michael Smith said.

Despite strong profits, the challenge for Australian banks is to cap or cut costs to squeeze out earnings growth at a time when lending is in decline and global economic turmoil can raise the cost of funds.

ANZ said it was confident about Asia’s long-term growth prospects and believed the environment could create growth opportunities. ANZ aims to nearly treble Asian contribution to group profit to up to 30 percent by 2017.

The Asian business, which largely focuses on tapping trade flows, also gives ANZ customer deposits enabling it to cut reliance on wholesale funds.

Global uncertainty and market volatility make Australian and South Korean lenders the most vulnerable in Asia because they suffer from significant deposit deficiencies and need to tap debt markets in Europe and the United States for funds. Australia’s four major banks combined are set to borrow $100 billion this financial year, largely offshore, to bridge a funding gap between loans and deposits. Such turmoil raises their funding costs.

The banks are still reeling from sharp rises in costs as they refinance cheap debt raised before the 2008 global financial crisis.

Customer funding represented 61 percent of its funding base, up from just half in 2008, it said adding the wholesale funding task was complete for the year to September 2011.

Australian banks are now focusing on cost cuts to offset a lack of core growth. On Tuesday, rival Westpac (WBC.AX) said staff numbers would fall this year and the next.

The banks have, however, shrugged off worries of getting hit by another global financial crisis, saying they have built up significant liquidity and capital.

ANZ said group lending grew 1.4 percent, which was well below historical average of over 10 percent and added deposit growth has exceeded loan growth by about A$15 billion so far this year.

PROFITS JUST SHY OF VIEWS

ANZ said fiscal third-quarter underlying profit was A$1.4 billion, up from A$1.3 billion reported a year ago and against A$1.46 billion forecast by seven analysts polled by Reuters.

Underlying profit excludes one-off, non-cash accounting items and investment gains or losses.

The profit puts ANZ on course for another record year.

Bad-debt charges were A$328 million, bringing total provisions charges for the first nine months to A$989 million, nearly a third lower than a year ago.

Group margin, a key measure of profitability, excluding global markets grew 2 basis points, ANZ said. Tier I capital, a measure of a bank’s ability to absorb losses, stood at 10.6 percent, it said.

ANZ shares were down 4.1 percent in early trade taking losses for the year so far to 16.5 percent, making it the worst performer among the top four banks as foreign investors have sold holdings over global caution on financial stocks.

Reporting by Narayanan Somasundaram; Editing by Ed Davies

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