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  1. #401
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    Default More on 'Stressed Loans'

    Quote Originally Posted by Snoopy View Post
    The definition of a 'write off' is not ambiguous. When an asset is gone it is gone! Other categories of loan risk are more fluid. There is not a consistant nomenclature for players in the industry to use. I have used the term 'vulnerable loans ' to mean something lesser on the problem scale than 'stressed loans'. But both of these are lesser problem child categories than the term 'Write Off'. Specifically for UDC and Heartland, the definitions that I have used (for stressed loans) look like this:

    UDC Finance Categories Heartland Behavioural Categories Heartland Judgement Categories
    Snoopy 'Stressed Loans' Loan Categories 7 and 8
    plus 'Default' loans
    less Provision for Credit Impairment.
    {Note: There is no loan category 9}
    a/ Loans at least 90 days past due
    plus b/ Loans individually impaired .
    plus c/ Restructured assets.
    less d/ Provision for Impairment
    a/ Loans at least 90 days past due
    plus b/ Loans individually impaired .
    plus c/ Restructured assets.
    less d/ Provision for Impairment

    The above definitions are not definitive. I am simply tabulating them so that readers can get a comparative sense of what I am talking about

    I did remove the credit impairment from my newly named 'Stressed Loans' category. I am not sure if that was an improvement or not! Effectively I am saying that an impaired loan written 'off the books' is no longer stressed. I am also drawing a line in the sand between 'Stressed Loans' and 'Impaired Loans'. I thought this was useful as I wanted to see if the movement of 'Stressed Loans' and 'Impaired Loans' showed a distinct correlation over time between my self defined 'Stressed' and 'Impaired' categories. The idea here was that if a loan (or more correctly portion of a loan) started out 'stressed' before it became 'impaired', one might expect a time slipped correlation between the two. However, 'stressed loans' might be more a 'judgement watch' event which is dependent on the biases of management. OTOH an impaired loan would surely require some management intervention that directly flows through to the account. So there exists the possibility that staff could downplay the number of 'stressed loans' to make the books look better than they really are to management.
    I now wish to expand my examination of 'stressed loans' to include the ANZ Bank as a whole. Banks work on International Standards to identify creditworthiness of loans. Unfortunately the most common international standard seems to be that each bank should set their own standard. The unfortunate consequence of that is that I have to introduce yet another definition of 'what is a stressed loan' for the ANZ Bank.

    UDC Finance Categories Heartland Bank Categories ANZ (Oz parent) Categories
    Snoopy 'Stressed Loans' Loan Categories 7 and 8
    plus 'Default' loans
    less Provision for Credit Impairment.
    {Note: There is no loan category 9}
    a/ Loans at least 90 days past due
    plus b/ Loans individually impaired .
    plus c/ Restructured assets.
    less d/ Provision for Impairment
    a/ Loans past due but not impaired.
    plus b/ Loans restructured.

    The guiding principle behind my definition of a 'stressed loan' is that such loans should not include loans or portions of loans already classified as impaired. In the case of ANZ, this is easy because the 'Impaired Loans' as shown in the ANZ Annual Report 2016 p114 are already shown as a separate and distinct loan category. So how does the five year picture for the 'stressed loan' position of the ANZ Bank unfold? And could we have used this picture to predict the capital raising of FY2015 before it was announced?


    SNOOPY
    Last edited by Snoopy; 16-01-2017 at 10:24 AM.
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  2. #402
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    Default ANZ 'Stressed' and 'Impaired' loan trend: 2012 to 2016

    Quote Originally Posted by Snoopy View Post
    So how does the five year picture for the 'stressed loan' position of the ANZ Bank unfold? And could we have used this picture to predict the capital raising of FY2015 before it was announced?
    "Stressed' Loans on the books (X) Net Financial Recivables (Impairment deducted) (Y) (X)/(Y) Impaired Loans Gross Financial Recivables (Z) (W)/(Z)
    FY2012 $11,639m $425,188m 2.74% $2,635m $427,823m 0.6159%
    FY2013 $12,099m $481,575m 2.51% $2,311m $483,886m 0.4776%
    FY2014 $12,319m $520,859m 2.37% $1,552m $522,141m 0.2972%
    FY2015 $13,142m $569,535m 2.31% $1,403m $570,938m 0.2437%
    FY2016 $14,052m $575,139m 2.44% $1,368m $576,507m 0.2373%

    The above chart shows a steady decrease in 'impaired loans' as a percentage of all loans. The rights issue capital injection happened just prior to the end of FY2015. But the impaired loan picture was steadily improving before then.

    Contrast this to the 'stressed loan' picture, steadily getting worse in dollar terms. However in percentage terms it was falling too (until FY2016), albeit not as fast as the percentage picture of impaired loans.

    So my predictor statistic, for checking out the likelihood of a capital raising has failed its purpose :-(. Or has it?

    SNOOPY
    Last edited by Snoopy; 16-01-2017 at 10:51 AM.
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  3. #403
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    Default

    Quote Originally Posted by Snoopy View Post

    So my predictor statistic, for checking out the likelihood of a capital raising has failed its purpose :-(. Or has it?
    To answer my own question, we need to back to the Chairnan's address from the Annual Report of 2015. This from the paragraph headed "Strengthening Capital":


    ------

    "During the year the Financial System inquiry found that Australia has sound financial system which provides a strong plautform for the Australian economy. The inquiry also recommended that Australian banks should be 'unquestionably strong.'

    "Capital is one measure of strength and subsequently the "Australian Prudential Regulation Authority" increased the capital allocated against Australian home lending which applies from July 2016."

    "In response to the changing regulatory, ANZ continued to strengthen its capital position."

    -----

    The message I take from this is that ANZ never believed they had a problem with housing lending. But APRA decided that an extra degree of robustness should be built into the financial system. So they manadated that more capital should be held by banks. This was a regulatory change, not feeding from any actual problem in bank lending. But mandated because if there was a serious housing downturn, then there might be a problem in the future. Accounts do not reflect a problem that might exist outside of their risk assessment guidelines. So it is unreasonable to expect any prior warning indicators (such as my 'stressed loans') to fire. "Stressed loans" is meant to cover existing loans that need attention, not loans that might need attention in the future. In summary, I don't think it is worth dismissing my indicator because it failed to forsee a regulatory change by APRA.

    More supportive of what I am doing is a statement from the FY2016 Chairman's Report.

    --------

    "The environment for banking is becoming more difficult. The sector is facing lower revenue growth and after many years of improving credit quality is seeing debt provisioning returning to something closer to the long run average."

    --------

    Taking the historical perspective, from the FY2016 accounts, the numbers say that debt provisioning was reducing over FY2016. But taking the forward view, as reflected by growing 'Stressed Loans', the future provisioning debt indicator is showing that provisioning may well grow. We will know for sure when the FY2017 results are out.

    SNOOPY
    Last edited by Snoopy; 13-05-2017 at 11:28 PM.
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  4. #404
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    An interesting topic, Snoopy.

    APRA is due to make an early ruling on Australian requirements arising out of the new Basle capital adequacy pronouncements. Latest thinking in Aust seems to that these will be watered down somewhat and that the four "pillars" will manage without further capital raisings. In fact, a commentator recently suggested that 2017 may turn out to be a "capital management" year for ANZ involving either a buyback or a special dividend later in the year or early 2018. This seems to me to be a rather extreme possibility - but we'll see!

  5. #405
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    Default Buffett Point 1/ FY2016: Top Three Position in Chosen Operating Markets

    I aim to assess whether the ANZ Bank is a suitable candidate to which to apply the (Mary) 'Buffett' growth model .

    Parent ANZ, incorporated in Australia, describes the operation of their business in the FY2016 Annual Report as follows:

    1/ Raising funds through customer deposits and wholesale debt markets.
    2/ Lending those funds to customers in both the 'personal lending' (personal home loans, credit cards, overdrafts) and business (corporate and institutional lending).
    3/ Operating 'funds management', 'insurance' and 'superannuation' divisions.

    The business is based around strong Australian and New Zealand foundations, leveraging 'geographic footprint' and 'market leading service'.

    The business objectives are to support:

    1/ Australian and New Zealand homeowners and small business customers,
    2/ Regional Trade and Capital Flows for business customers via the IIB ("International and Institutional Banking Division".)
    3/ A 'digital ready infrastructure'.

    Major Competitors in this sector are listed in order by $A revenue (interest income).

    1/ Commonwealth Bank of Australia: $33,817m
    2/ Westpac Bank: $31,822m
    3/ ANZ Bank: $29.951m
    4/ National Australia Bank $27,629m

    Conclusion: As number three in the market, ANZ passes the first Buffett Point test.

    SNOOPY
    Last edited by Snoopy; 16-06-2017 at 06:45 PM.
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  6. #406
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    Default Buffett Point 2/ FY2016: Sustainable 'eps' trend

    The trend below is required to track higher for five years with one setback allowed.

    Financial Year Net Sustainable Profit (A) Shares on Issue EOFY (B) eps (A)/(B)
    2012 $6,132m 2,744m $2.24
    2013 $6,599m 2,757m $2.39
    2014 $7,111m 2,757m $2.58
    2015 $7,130m 2,903m $2.46
    2016 $6,834m 2,927m $2.33

    Result: Fail Test

    SNOOPY

    PS Readers may notice a divergence between some of these 'eps' figures and those published elsewhere. The figures I use are 'normalised' by a number of adjustments. For example the FY2016 and FY2015 'normalised profits' are calculated as follows (Most adjustments may be found under the 'Non Interest Income' (Note 4) and 'Expenses' (Note 5) sections of the "FY2016 Annual Report":

    FY2016 FY2015
    Declared NPAT 'Cash Profit' $5,889m $7,216m
    add Movement on other Financial Instruments at fair value through profit & loss +0.7x $214m -0.7x $241m
    add Impairment charge from AMMB Holdings Berhaud +0.7x $260m
    remove Gain on selling stake in Bank of Tianjin -0.7x $29m
    remove Gain on Ensada divestment -0.7x $66m
    remove Loss on CVA methodology change +0.7x $237m
    add back Restructuring charges +0.7x $278m +0.7x $31m
    add back Amortising & Impairment of Other Intangibles +0.7x $83m +0.7x $88m
    add back Software Amortisation Policy Change (Incremental) +0.7x ($556m- $188m)
    Total $6,834m $7,130m

    Not everyone may agree with the way I have done these adjustments. But if you want a picture of the ongoing profitability of ANZ you have to do them. I see that someone has quoted the eps figure from the 4-traders website for FY2016 as $1.89 per share.

    If you just pull the headline profit figure out of the annual report of $5,709m and divide by the number of shares on issue I get:

    $5,709m / 2,927m = $1.95

    Not sure how they got down to $1.89. But I would describe that figure as seriously misleading (a 20% error) and not reflective of the underlying performance of ANZ for FY2016. I just wanted to make the point of not believing everything you read on some of these websites! Even using ANZ's preferred metric of cash profit this is down by 18% YOY. The impression might be that ANZ has a disastrous year. Yet taking out the 'one off' adjustments, my representative profit declined by only 4%. An unwelcome development, but not something that I would dub a major concern.

    When making these adjustments it is not always clear which pieces of data should be adjusted. I am working from something called the 'cash profit'. AR2016 p18 shows that to make the bridge between ''statuatory profit' and 'cash profit' you make the following adjustments:

    a/ Allow for treasury share dividends.
    b/ Correct for Revaluation of policy liabilities
    c/ Correct for economic hedges
    d/ Correct for revenue hedges
    e/ Correct for 'Structured credit intermediation trades'

    These adjustments have already been made if you start with 'cash profit'. So when perusing Note 4 and Note 5, I paid particular attention not to adjust for these items again, as to do so would have been 'double counting.' Did I get all my adjustments right? I can't say. But I have tried to be consistent with my adjustments. In a multi-year comparison I think being consistent is more important than chasing down the last decimal point of accuracy.

    SNOOPY
    Last edited by Snoopy; 13-05-2017 at 11:31 PM. Reason: Corrected typos in sample calculation
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  7. #407
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    Quote Originally Posted by Snoopy View Post
    ...I see that someone has quoted the eps figure from the 4-traders website for FY2016 as $1.89 per share.

    If you just pull the headline profit figure out of the annual report of $5,709m and divide by the number of shares on issue I get:

    $5,709m / 2,927m = $1.95

    Not sure how they got down to $1.89. But I would describe that figure as seriously misleading (a 20% error) and not reflective of the underlying performance of ANZ for FY2016. I just wanted to make the point of not believing everything you read on some of these websites!
    ANZ FY2016 Annual Report, Page 62, Income Statement for the year ended 30 September, Earnings per ordinary share (cents), Diluted, 189.3

    You really should read the reports carefully.

    Paper Tiger
    om mani peme hum

  8. #408
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    Quote Originally Posted by Paper Tiger View Post
    ANZ FY2016 Annual Report, Page 62, Income Statement for the year ended 30 September, Earnings per ordinary share (cents), Diluted, 189.3

    You really should read the reports carefully.

    Paper Tiger
    Oh no,he has done it again!!
    "Seriously misleading"....lol.
    Last edited by percy; 30-01-2017 at 08:22 PM.

  9. #409
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    Default

    Quote Originally Posted by percy View Post
    Oh no,he has done it again!!
    "Seriously misleading"....lol.
    Firstly thanks to PT for pointing out where the reported 'eps' figure came from.

    "Earnings per ordinary share (cents), Diluted, 189.3"

    'Diluted' means that whoever did the calculation has taken into account outstanding ANZ options that are about. Personally I don't do that because:

    1/ There is no guarantee options will ever be exercised (although I admit in the case of a well performing stable business they usually are).
    2/ It makes the eps calculation more complicated, as it means you have to dig through the annual report to find the options, rather than just taking the number of shares on issue now at face value.
    3/ In many cases the options are only as small percentage of the shares on issue anyway, and leaving them out of the calculation doesn't change things that much.

    By adding the options in, and using a headline earnings figure, eps drops from 195 to 189, a drop of 3%. I think most reasonable people would see that this 'error' (if you want to call it that) is not material.

    OTOH a change of nearly 20% for FY2016, using the normalising assumptions I made is very material.

    SNOOPY
    Last edited by Snoopy; 31-01-2017 at 09:08 AM.
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  10. #410
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    Default Buffett Point 3/ FY2016: Return on Equity history

    The table is required to have an ROE figure of >15% for five years in a row, with one setback allowed.

    Financial Year Net Sustainable Profit (A) Shareholder Equity EOFY (B) ROE (A)/(B)
    2012 $6,132m $41,240m 14.9%
    2013 $6,599m $45,603m 14.5%
    2014 $7,111m $49,284m 14.4%
    2015 $7,130m $57,353m 12.4%
    2016 $6,834m $57,927m 11.8%

    Result: Fail Test

    By way of comparative observation though, despite ANZ ROE suffering a declining trend while the Heartland ROE trend is rising, the ANZ ROE in absolute terms remains noticably superior to Heartland

    SNOOPY
    Last edited by Snoopy; 31-01-2017 at 09:11 AM.
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