Shayne Elliott: "We have taken the opportunity to move decisively and adapt to the changing environment by building a simpler, better capitalised and more balanced bank." Credit:Josh Robenstone Mr Elliott, who conceded ANZ had probably expanded too aggressively into Asia, also vowed to redirect its capital towards domestic lending to consumers and small businesses, at the expense of its institutional business. He also signalled a tough approach on costs, after the bank's total staff numbers dropped by more than 2300 in the year to March. After a capital raising last year diluted earnings per share, the bank's dividend payout ratio had jumped outside its previous target range, and Mr Elliott flagged a more conservative approach. It will now target a payout ratio of 60 to 65 per cent over the longer term, down from 65 to 70 per cent at present. "We want to set the dividend prudently. Could have maintained it and hung on? I guess so, but we don't want to run a bank like that, that is on the edge all the time," Mr Elliott told analysts.

Sharemarket responds favourably Despite the dividend cut and profit results that were below expectations, analysts and the sharemarket generally responded favourably. ANZ shares surged 5.6 per cent to $25.05, after initially falling 4 per cent on the news. Observers say such a rebound may have been triggered by short-sellers closing out their trades, which involves buying stock. Even so, Andrew Martin, principal at fund manager Alphinity, said it was "somewhat astounding" the ANZ board had decided to cut its dividend in response to only a slight turn in the credit cycle. The last time Australia's big banks lowered dividends was when soured loans were much higher in the global financial crisis, and Mr Martin said banks should have larger "buffers" to prevent changes such as ANZ's cut.

"They absolutely stretched themselves, and got themselves in a position that you should not have as a bank," Mr Martin said. Some fund managers argue that as no bank wants to be the first to reduce dividends, the move may increase pressure for a dividend cut at National Australia Bank, which also has a payout ratio outside its target range. NAB reports its earnings on Thursday. Macquarie analyst Victor German said he believed ANZ's dividend of 80¢ a share would the "low point," and Mr Elliott's greater emphasis on retail and commercial banking in Australia should ultimately improve returns, supporting dividend growth. "If you believe what they are trying to achieve over the medium term, this should be a higher-returning business, and higher-returning businesses can generally afford to pay higher dividends," Mr German said. Mr German is also predicting NAB will reduce its dividend later this year. UBS analyst Jonathan Mott said reducing the dividend and payout ratio was a "prudent move", which would put ANZ in a stronger position to deal with changes to capital rules expected next year.

Key numbers Excluding the specified items, ANZ's cash profit was $3.5 billion, down 4 per cent. Market analysts had expected a cash profit of $3.58 billion and an interim dividend of 86¢ a share. The Australian bank performed strongly but the institutional bank was "doing it tough", Mr Elliott said. The core Australian division posted a 6 per cent lift in profit to $1.75 billion. But institutional business posted a 41 per cent plunge in profits to $632 million in the half, earnings also dropped 46 per cent in its Asia retail and Pacific business. Margins are under pressure from intense competition, the institutional bank is facing cost pressures from regulation and technology, lower trade volumes and reduced credit quality.

As investors focus on rising bad debts for the banks, ANZ said total provisions for bad and doubtful debts were $918 million, in line with a warning in bad debts in March. Return on equity, a key gauge of profitability, fell to 12.2 per cent from 13.2 per cent six months earlier, and its net interest margin narrowed by 1 basis point, to 2.01 per cent. Credit conditions With the market focused on the quality of credit after Westpac Banking Corp on Monday lifted provisions against bad loans in its institutional bank, ANZ said loss rates were "trend towards the long term average from historically low levels". with problem loans linked to low commodity prices. with James Eyers