ANZ Banking Group's quarterly update gave the sector another leg up on Friday as caution gave way to renewed optimism for Australian banks.
The bank reported a 31 per cent rise in cash profit to $2 billion for the three months to December 31 driven by higher markets income, lower than expected provisioning and better contributions from its retail and commercial divisions.
Performance has been benchmarked against the average quarterly result from the last two halves as the bank continues its transformation.
CEO Shayne Elliott said the result was evidence that the strategy to simplify the bank's activities was working and that the outlook for the bank was improving.
"It is still too early to be definitive about the year as a whole however the first quarter together with our experience during the first six weeks of the second quarter suggests the credit environment is marginally better than we expected," Mr Elliott said.
ANZ rose 1.7 per cent or 52¢ to $30.73 at 3pm AEDT or within striking distance of the bank's 52-week high of $31.84. The rise was in contrast to the broader market which was down 0.2 per cent. Commonwealth Bank and Westpac also rose while NAB eased.
The one cloud on the horizon was a decline in the net interest margin (NIM) or the difference between the rate at which bank borrows and rate at which it lends. The bank said the decline was "several" basis points (bps) but did not define the quantum.
Bank watchers have interpreted the statement to mean a mid-single digit decline from its NIM of 200 bps as of September 30, 2016.
Ausbil Investment Management founder and chief investment officer Paul Xiradis said that the figures represented a solid result after accounting for the one-offs including realised property gains. The rise in funding costs however was something to keep an eye on.
"My concern is that the net interest margin was weaker than anticipated. Having said that the quality of the bank's loan book is strong, bad and doubtful debts are receding and capital positions for all the banks are looking quite strong."
The bank has said that the weakness in NIM has come from higher funding costs that flowed from growth in household and commercial deposits.
The $2 billion headline figure beat analyst expectations by between $300 million and $400 million. Revenues grew at 7 per cent for the quarter while expenses were down 4 per cent, delivering the analyst community with the highly sought after positive jaws.
Lower than expected provisioning for bad and doubtful debts also contributed to the result with the bank reporting a small rise of 1.8 per cent to $283m for the quarter.
Higher income from markets also provided a handy fillip with the bank reporting a 40 per cent increase in markets income to $706 million as bond prices fell and the USD strengthened.
The bank also singled out the success of contactless payment systems such as Apple Pay and Android Pay in attracting new customers. ANZ Bank is the only one of the big four to embrace Apple Pay.
Macquarie analyst Victor German said investors should be cautious about extrapolating the numbers to the rest of calendar 2017, however the unexpectedly strong result should lead to a round of 12-month consensus share price upgrades for the bank from analysts.
