Net income in the six months ended March 31 rose to A$2.92 billion ($3.02 billion) from A$2.66 billion a year earlier, the bank said today, matching analyst estimates compiled by Bloomberg. Underlying profit from the Asia Pacific, Europe and America unit rose 21 percent from the previous six months.

Chief Executive Officer Michael Smith is cutting jobs, trimming expenses and turning to Asia’s faster-growing economies to help offset a struggling domestic housing market and rising funding costs. Australia’s central bank said yesterday that Europe’s debt crisis might deliver “adverse shocks” for some time as it cut benchmark borrowing costs at home by a larger- than-expected margin to spur economic growth.

“There’s strong momentum from overseas, so they’re heading in the right direction,” said TS Lim, an analyst at Bell Potter Securities Ltd. in Sydney with a “buy” rating on ANZ Bank stock. “It’s going to be tough with margins over here, but there’s still room for efficiency gains.”

‘Subdued’

ANZ Bank stock dropped 1.3 percent to A$23.69 at 10:21 a.m. in Sydney after underlying profit in Australia fell 7 percent from the previous six months and lending margins narrowed. CEO Smith called the performance “subdued.”

The stock decline trimmed the year’s gain to 16 percent, still ranking the stock as the best performer among a quartet of Australian banks that includes National Australia Bank Ltd. (NAB),Commonwealth Bank of Australia (CBA) and Westpac Banking Corp. (WBC)

“We are managing in what could be described as a ‘work out’ phase in the global economy with the situation most acute in Europe,” Smith said in a statement. “This will continue to cause volatility in global markets for many years.”

Net loans and advances in the Asia-Pacific region, Europe and America surged 32 percent from the same period a year earlier, more than four times the pace of growth in Australia, ANZ Bank said. Deposits at those offshore locations jumped 34 percent, more than double the advance at home.

At the bank’s institutional division, growth in profit, lending, and deposits also outpaced advances in Australia.

Australian ‘Drag’

The result showed the value of reducing the bank’s reliance on Australia, which was a “drag” on earnings, Smith told reporters today. The profitability of lending in the bank’s domestic market is declining and there’s a “persistently lower demand for credit,” he said.

The bank’s group net interest margin, a measure of the profitability of lending, fell 9 basis points from a year earlier. The lowest profitability was in Australia, where the margin dropped 15 basis points, according to a presentation filed to the stock exchange.

“The issue in Australia was continued margin pressure driven by higher deposit pricing and higher long-term wholesale funding costs,” Smith told investors on a call.

Even after yesterday’s rate cut by the central bank, Australia has the highest borrowing costs among major developed nations, weighing on the housing market and consumer confidence.

Sales of new homes in Australia fell in March to a record low, according to the Canberra-based Housing Industry Association. House prices declined in the three months through March in the longest losing streak in at least a decade, the Australian Bureau of Statistics said yesterday.

Fewer Targets

Even as Smith focuses on expanding in Asia, he said there are fewer opportunities to buy assets than he expected.

“We thought a number of European banks would sell Asian assets to delever, but that pressure has eased off,” he told reporters. “I’m probably a bit mean on price and the opportunities are not as plentiful as we hoped.”

National Australia Bank, the country’s fourth-largest bank, on April 30 reported a 16 percent decline in net income in the six months ended March 31 as it booked charges to shrink its U.K. business. Cash earnings, which excluded those costs, increased 5.7 percent to A$2.82 billion in the period, the Melbourne-based bank said.

ANZ Bank’s Smith said in February that credit growth in Australia was unlikely to return to pre-crisis levels in the “foreseeable future.” The same month, the bank said it would cut about 1,000 jobs by Sept. 30.

To contact the reporters on this story: Angus Whitley in Sydney at awhitley1@bloomberg.net; Brett Foley in Melbourne at bfoley8@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

http://www.bloomberg.com/news/2012-05-01/anz-bank-first-half-profit-rises-10-as-offshore-earnings-surge.html

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