SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 6-K

REPORT OF FOREIGN ISSUER

PURSUANT TO RULE 13A-16 OR 15D-16 OF

THE SECURITIES EXCHANGE ACT OF 1934

27 June 2007

Australia and New Zealand Banking Group Limited

ACN 005 357 522

(Translation of registrant’s name into English)

Level 6, 100 Queen Street Melbourne Victoria 3000 Australia

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F: x

Form 40-F o

 

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o

No x

                                                                                               

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):

This Form 6-K may contain certain forward-looking statements, including statements regarding (i) economic and financial forecasts, (ii) anticipated implementation of certain control systems and programs, (iii) the expected outcomes of legal proceedings and (iv) strategic priorities.  Such forward- looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control and which may cause actual results to differ materially from those expressed in the forward-looking statement contained in these forward- looking statements.  For example, these forward-looking statements may be affected by movements in exchange rates and interest rates, general economic conditions, our ability to acquire or develop necessary technology, our ability to attract and retain qualified personnel, government regulation, the competitive environment and political and regulatory policies.  There can be no assurance that actual outcomes will not differ materially from the forward-looking statements contained in the Form 6-K.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		Australia and New Zealand Banking Group Limited
		(Registrant)
		By:	/s/ John Priestley
			Company Secretary
			(Signature)*
Date: 29 June 2007

 

* Print the name and title of the signing officer under his signature.

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Australia and New Zealand Banking Group Limited

ABN 11 005 357 522

Half Year
31 March 2007

Consolidated Financial Report
Dividend Announcement and
Appendix 4D

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AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED

ABN 11 005 357 522

 

CONSOLIDATED FINANCIAL REPORT

Half year ended 31 March 2007

CONTENTS
HIGHLIGHTS
FINANCIAL HIGHLIGHTS
Profit
Cash profit
Earnings per share
Balance Sheet
Financial ratios
Business unit analysis
CHIEF FINANCIAL OFFICER’S REVIEW
March 2007 half year compared to March 2006 half year
March 2007 half year compared to September 2006 half year
Non-core items
Reconciliation of net profit to cash profit
Income and expenses
Credit Risk
Income Tax Expense
Earnings per share
Dividends
EVATM Reconciliation
Market Risk
Balance Sheet
Capital Management
Deferred acquisition costs and deferred income
Software capitalisation
BUSINESS PERFORMANCE REVIEW
GEOGRAPHIC SEGMENT PERFORMANCE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)– TABLE OF CONTENTS
DEFINITIONS
ALPHABETICAL INDEX

 

This Results Announcement has been prepared for Australia and New Zealand Banking Group Limited (the “Company”) together with its subsidiaries which are variously described as “ANZ”, “Group”, “ANZ Group”, “us”, “we” or “our”.

All amounts are in Australian dollars unless otherwise stated.  The Company has a formally constituted Audit Committee of the Board of Directors.  This report was approved by resolution of a Committee of the Board of Directors on 26 April 2007.

When used in this Results Announcement the words “estimate”, “project”, “intend”, “anticipate”, “believe”, “expect”, “should” and similar expressions, as they relate to ANZ and its management, are intended to identify forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  Such statements constitute “forward-looking statements” for the purposes of the United States Private Securities Litigation Reform Act of 1995.  ANZ does not undertake any obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

HIGHLIGHTS

ANZ 2007 Interim Profit $2,102 million

All figures compared to March 2006 half year unless otherwise indicated

Profit after tax
Profit $2,102 million		up 16.1	%
Cash* profit $1,936 million		up 11.8	%
Cash* profit before provisions $2,995 million		up 12.1	%

 

Earnings per share
EPS 113.2 cents		up 15.0	%
Cash* EPS 104.2 cents(1)		up 10.9	%

 

Shareholder return
Interim dividend 62 cents		up 10.7	%
Total Shareholder Return		17.1	%
Cash* Return on equity		19.7	%

 

Business highlights*

Revenue growth of 9.1%* and continued frontline investment with 2,120 new FTEs

Result in Personal - revenue up 14.4%, profit up 21.6%

Institutional profit up 10.6%.  Profit before provisions up 4.2%

Profit before provisions in New Zealand Businesses up 13.5% but offset by provisioning

Continued growth in customer acquisition in Australia and a successful turnaround in New Zealand

Achieved targeted revenue and productivity:

Revenue growth 9.1% (10.4% FX adjusted)

Cost-Income ratio 44.3% (down 1.5% from 45.8%, medium-term target 40%)

Provisioning rose but ended below expectations as a result of large recoveries late in the half

Adjusted Common Equity ratio middle of target range at 4.4%(2)

*      Adjusted for non-core items (including significant items, ANZ National Bank incremental integration costs and AIFRS mark to market of certain hedge gains/losses).  Refer page 13 for a detailed reconciliation of GAAP figures to non-GAAP cash figures.  Refer pages 11 to 12 for a discussion of why management believe measures of cash profit provide useful information to investors regarding ANZ’s financial condition and results of operations

(1)          Refer page 23

(2)          Adjusted common equity is calculated as Tier 1 capital less preference shares at current rates and deductions from total capital.  This measure is commonly used to assess the adequacy of common equity held

1

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FINANCIAL HIGHLIGHTS

Profit

		Half		Half		Half		Movt		Movt
		year		year		year		Mar 07		Mar 07
		Mar 07		Sep 06		Mar 06		v. Sep 06		v. Mar 06
		$M		$M		$M		%		%
Net interest income		3,611		3,575		3,368		1	%	7	%
Other operating income		2,002		1,614		1,595		24	%	26	%
Operating income		5,613		5,189		4,963		8	%	13	%
Operating expenses		(2,386	)	(2,346	)	(2,185	)	2	%	9	%
Profit before credit impairment and income tax		3,227		2,843		2,778		14	%	16	%
Provision for credit impairment		(240	)	(183	)	(224	)	31	%	7	%
Profit before income tax		2,987		2,660		2,554		12	%	17	%
Income tax expense		(883	)	(780	)	(742	)	13	%	19	%
Minority interest		(2	)	(3	)	(1	)	-33	%	100	%
Profit attributable to shareholders of the Company		2,102		1,877		1,811		12	%	16	%

 

Cash profit

Profit has been adjusted to exclude the following non-core items to arrive at cash profit.

		Half		Half		Half		Movt		Movt
		year		year		year		Mar 07		Mar 07
		Mar 07		Sep 06		Mar 06		v. Sep 06		v. Mar 06
		$M		$M		$M		%		%
Profit attributable to shareholders of the Company		2,102		1,877		1,811		12	%	16	%
Less: Non-core items
Significant items(1)
Sale of Esanda Fleetpartners		141		—		—		n/a		n/a
Settlement of ANZ National Bank claims		—		—		14		n/a		-100	%
Settlement of NHB insurance claim		—		—		79		n/a		-100	%
Total significant items		141		—		93		n/a		52	%
Ineffective hedge fair value gains/losses(2)		28		21		13		33	%	large
NZD revenue hedge mark to market volatility(2)		(3	)	—		—		n/a		n/a
ANZ National Bank incremental integration costs(3)		—		—		(26	)	n/a		-100	%
Total non-core items		166		21		80		large		large
Cash profit(4),(5)		1,936		1,856		1,731		4	%	12	%

 

(1)          In the March 2007 half ANZ has classified the profit on sale of Esanda Fleetpartners of $195 million ($141 million after tax) as a significant item.  In the March 2006 half ANZ classified the $113 million ($79 million after tax) settlement of the NHB insurance matter and the $14 million settlement of a dispute with Lloyds TSB over the accounting treatment of certain items in the completion accounts for the acquisition of National Bank of New Zealand Limited (tax on settlement: $nil) as significant items.  ANZ excludes significant items to eliminate the distorting effect of one-off transactions on the results of its core business (refer page 11)

(2)          The Group enters into economic hedges to manage its interest rate and foreign exchange risk.  In the March 2007 half ANZ has classified $28 million after tax (Sep 2006 half: $21 million; Mar 2006 half: $13 million) relating to economic hedging as a non-core item (tax impact $13 million (Sep 2006 half: $10 million; Mar 2006 half: $5 million)).  Included in this non-core amount is ineffectiveness arising from designated accounting hedges, any volatility arising from usage of the fair value option and approved classes of derivatives not designated in accounting hedge relationships but that are considered to be economic hedges.  In addition, ANZ has classified a $3 million loss after tax (Sep 2006 half: $nil; Mar 2006 half: $nil) relating to New Zealand revenue hedges that under the transitional provision of AASB 139 (AASB 2005-1) no longer qualify for hedge accounting from 1 October 2006 (tax impact $1 million credit).  ANZ excludes volatility associated with fair value movements on these transactions to provide a better indication of the core business performance (refer page 12)

(3)          In the March 2006 half ANZ incurred $26 million after tax from ANZ National Bank incremental integration costs.  Tax on ANZ National Bank incremental integration costs was $13 million.  The integration program was completed in March 2006.  ANZ National Bank incremental integration costs are excluded to better reflect the core cost base and assist analysis of the cost base following completion of the integration

(4)          Refer page 13 for a reconciliation of cash profit to net profit

(5)          Refer pages 11 to 12 for a discussion of why management believes measures of cash profit provide useful information to investors regarding ANZ’s financial condition and results of operations

2

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Analysis of Cash(1) profit by key line item:

		Half		Half		Half		Movt		Movt
		year		year		year		Mar 07		Mar 07
		Mar 07		Sep 06		Mar 06		v. Sep 06		v. Mar 06
		$M		$M		$M		%		%
Net interest income		3,611		3,575		3,368		1	%	7	%
Other operating income		1,770		1,583		1,563		12	%	13	%
Operating income		5,381		5,158		4,931		4	%	9	%
Operating expenses		(2,386	)	(2,346	)	(2,259	)	2	%	6	%
Profit before credit impairment and income tax		2,995		2,812		2,672		7	%	12	%
Provision for credit impairment		(240	)	(183	)	(224	)	31	%	7	%
Profit before income tax		2,755		2,629		2,448		5	%	13	%
Income tax expense		(817	)	(770	)	(716	)	6	%	14	%
Minority interest		(2	)	(3	)	(1	)	-33	%	100	%
Cash(1) profit		1,936		1,856		1,731		4	%	12	%

 

Earnings per share

		Half		Half		Half		Movt		Movt
		year		year		year		Mar 07		Mar 07
		Mar 07		Sep 06		Mar 06		v. Sep 06		v. Mar 06
		$M		$M		$M		%		%
Earnings per ordinary share (cents)
Basic		113.2		101.6		98.4		11	%	15	%
Diluted		110.0		98.5		95.5		12	%	15	%
Cash(1)(basic adjusted for non-core items)		104.2		100.5		94.0		4	%	11	%

 

Balance Sheet

								Movt		Movt
		As at		As at		As at		Mar 07		Mar 07
		Mar 07		Sep 06		Mar 06		v. Sep 06		v. Mar 06
		$M		$M		$M		%		%
Assets
Liquid assets		15,433		15,019		13,870		3	%	11	%
Due from other financial institutions		6,439		9,665		8,336		-33	%	-23	%
Trading and available for sale assets		24,100		19,832		22,008		22	%	10	%
Net loans and advances including acceptances		281,822		269,384		255,745		5	%	10	%
Other		23,930		20,740		22,222		15	%	8	%
Total assets		351,724		334,640		322,181		5	%	9	%
Liabilities
Due to other financial institutions		14,872		14,118		13,345		5	%	11	%
Deposits and other borrowings		210,585		204,794		196,850		3	%	7	%
Liability for acceptances		14,013		13,435		13,692		4	%	2	%
Bonds and notes		54,188		50,050		46,923		8	%	15	%
Other		37,156		32,337		32,575		15	%	14	%
Total liabilities		330,814		314,734		303,385		5	%	9	%
Total shareholders’ equity		20,910		19,906		18,796		5	%	11	%

 

(1)          Refer footnotes 1 to 5 on page 2

3

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Financial ratios

		Half		Half		Half
		year		year		year
		Mar 07		Sep 06		Mar 06
		$M		$M		$M
Profit attributable to shareholders of the Company		2,102		1,877		1,811
Cash(1) profit		1,936		1,856		1,731
EVATM (2)		1,119		1,069		1,013
Profitability ratios
Return on:
Average ordinary shareholders' equity(3)		21.3	%	20.4	%	20.9	%
Average ordinary shareholders' equity(3) (cash(1) profit basis)		19.7	%	20.2	%	20.0	%
Average assets		1.21	%	1.13	%	1.15	%
Average assets (cash(1) profit basis)		1.11	%	1.11	%	1.10	%
Average risk weighted assets		1.73	%	1.59	%	1.60	%
Average risk weighted assets (cash(1) profit basis)		1.59	%	1.57	%	1.53	%
Total income		14.4	%	14.2	%	14.5	%
Net interest margin		2.24		2.33		2.29
Profit per average FTE ($)		64,203		59,187		58,202
Efficiency ratios
Operating expenses to operating income		42.5	%	45.2	%	44.0	%
Operating expenses to average assets		1.37	%	1.41	%	1.39	%
Operating expenses to operating income (cash(1))		44.3	%	45.5	%	45.8	%
Operating expenses to average assets (cash(1))		1.37	%	1.41	%	1.44	%
Credit impairment provisioning
Collective provision charge		52		33		36
Individual provision charge		188		150		188
Total provision charge		240		183		224
Individual provision charge as a % of average net advances		0.14	%	0.11	%	0.15	%
Ordinary share dividends (cents)
Interim - 100% franked (Mar 06: 100% franked)		62		n/a		56
Final - 100% franked (Sep 06: 100% franked)		n/a		69		n/a
Ordinary share dividend payout ratio(4)		54.9	%	68.0	%	56.9	%
Cash(1) ordinary share dividend payout ratio(4)		59.6	%	68.8	%	59.6	%
Preference share dividend (cents)
Dividend paid(5)		17		15		12

 

(1)          Refer footnotes 1 to 5 on page 2

(2)          EVATM refers to Economic Value Added, a measure of shareholder value.  See page 25 for a reconciliation of EVATM to reported net profit, a discussion of EVATM and an explanation of its relevance as a performance measure

(3)          Average ordinary shareholders’ equity excludes minority interest and preference share dividend

(4)          Dividend payout ratio is calculated using the proposed interim dividend as at 31 March 2007, the 30 September 2006 and 31 March 2006 dividends

(5)          Represents dividends paid on Euro Hybrid issued on 13 December 2004

4

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								Movt		Movt
		As at		As at		As at		Mar 07		Mar 07
		Mar 07		Sep 06		Mar 06		v. Sep 06		v. Mar 06
								%		%
Net Assets
Net tangible assets(1) per ordinary share ($)		9.01		8.53		7.99		6	%	13	%
Net tangible assets(1) attributable to ordinary shareholders ($M)		16,613		15,664		14,619		6	%	14	%
Total number of ordinary shares (M)		1,844.7		1,836.6		1,828.7		0	%	1	%
Capital adequacy ratio (%)
Tier 1		6.7	%	6.8	%	6.8	%
Tier 2		4.3	%	4.2	%	4.0	%
Total capital ratio		10.3	%	10.6	%	10.4	%
Adjusted Common Equity ratio(2)		4.4	%	4.7	%	5.0	%
Risk weighted assets EOP ($M)		250,485		240,219		230,653
Impaired assets
Collective provision ($M)		1,981		1,940		1,903		2	%	4	%
Collective provision as a % of risk weighted assets		0.79	%	0.81	%	0.83	%	-2	%	-5	%
Gross non-performing loans ($M)		640		661		726		-3	%	-12	%
Individual provisions on non-performing loans(3) ($M)		(275	)	(279	)	(305	)	-1	%	-10	%
Net non-performing loans ($M)		365		382		421		-4	%	-13	%
Individual provision as a % of total non-performing loans		43.0	%	42.2	%	42.0	%	2	%	2	%
Gross non-performing loans as % of net advances		0.23	%	0.25	%	0.28	%	-8	%	-18	%
Net non-performing loans as a % of net advances		0.13	%	0.14	%	0.16	%	-7	%	-19	%
Net non-performing loans as a % of shareholders’ equity(4)		1.7	%	1.9	%	2.2	%	-11	%	-23	%
Other information
Full time equivalent staff (FTEs)		33,183		32,256		31,063		3	%	7	%
Assets per FTE ($M)		10.6		10.4		10.4		2	%	2	%
Market capitalisation of ordinary shares ($M)		54,788		49,331		48,461		11	%	13	%

 

(1)          Equals shareholders’ equity less preference share capital, minority interest and unamortised goodwill and other intangibles

(2)          Adjusted common equity is calculated as Tier 1 capital, less Innovative Tier 1 capital instruments (converted at balance date spot rates), less transitional Tier 1 capital relief and deductions.  This measure is commonly used to assess the adequacy of common equity held

(3)          Excludes individual provision on unproductive facilities

(4)          Includes minority interest

5

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Business unit analysis

		Half		Half		Half		Movt		Movt
		year		year		year		Mar 07		Mar 07
		Mar 07		Sep 06		Mar 06		v. Sep 06		v. Mar 06
		$M		$M		$M		%		%
Profit after income tax(1)
Personal		783		654		583		20	%	34	%
Institutional		778		722		691		8	%	13	%
New Zealand Businesses		418		339		325		23	%	29	%
Partnerships & Private Bank		103		91		79		13	%	30	%
Non-continuing businesses		—		22		31		-100	%	-100	%
Group Centre		20		49		102		-59	%	large
Net profit		2,102		1,877		1,811		12	%	16	%

 

(1)          Prior period numbers have been adjusted for organisational structure changes.  Refer page 32 for an explanation of the changes

		Half		Half		Half		Movt		Movt
		year		year		year		Mar 07		Mar 07
		Mar 07		Sep 06		Mar 06		v. Sep 06		v. Mar 06
		$M		$M		$M		%		%
Profit after income tax(1)
Personal		709		654		583		8	%	22	%
Institutional		750		701		678		7	%	11	%
New Zealand Businesses(2)		351		339		337		4	%	4	%
Partnerships & Private Bank		103		91		79		13	%	30	%
Non-continuing businesses		—		22		31		-100	%	-100	%
Group Centre		23		49		23		-53	%	0	%
Cash profit(3)		1,936		1,856		1,731		4	%	12	%
Non-core items(3)		166		21		80		large		large
Profit		2,102		1,877		1,811		12	%	16	%

 

(1)          Prior period numbers have been adjusted for organisational structure changes.  Refer page 32 for an explanation of the changes

(2)          New Zealand Businesses growth rates in NZD terms were (1%) and 8% compared to the September 2006 half year and March 2006 half year respectively

(3)          Refer footnotes 1 to 5 on page 2

								Movt		Movt
		As at		As at		As at		Mar 07		Mar 07
		Mar 07		Sep 06		Mar 06		v. Sep 06		v. Mar 06
		$M		$M		$M		%		%
Net loans and advances including
acceptances by business unit(1)
Personal		140,226		133,652		126,776		5	%	11	%
Institutional		73,308		71,436		69,474		3	%	6	%
New Zealand Businesses(2)		66,672		61,937		56,935		8	%	17	%
Partnerships & Private Bank		1,592		1,270		1,204		25	%	32	%
Non-continuing businesses		—		1,054		1,337		-100	%	-100	%
Group Centre		24		35		19		-31	%	26	%
Net loans and advances including acceptances		281,822		269,384		255,745		5	%	10	%

 

(1)          Prior period numbers have been adjusted for organisational structure changes.  Refer page 32 for an explanation of the changes

(2)          New Zealand Businesses growth rates in NZD terms were 6% and 13% compared to the September 2006 half year and March 2006 half year respectively

6

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								Movt		Movt
		As at		As at		As at		Mar 07		Mar 07
		Mar 07		Sep 06		Mar 06		v. Sep 06		v. Mar 06
		$M		$M		$M		%		%
Deposits and other borrowings by business unit(1)
Personal		67,748		64,977		61,818		4	%	10	%
Institutional		76,094		69,239		65,381		10	%	16	%
New Zealand Businesses(2)		42,467		41,987		40,135		1	%	6	%
Partnerships & Private Bank		1,233		1,159		983		6	%	25	%
Group Centre		23,043		27,432		28,533		-16	%	-19	%
Deposits and other borrowings		210,585		204,794		196,850		3	%	7	%

 

(1)          Prior period numbers have been adjusted for organisational structure changes.  Refer page 32 for an explanation of the changes

(2)          New Zealand Businesses growth rates in NZD terms were 0% and 2% compared to the September 2006 half year and March 2006 half year respectively

								Movt		Movt
		As at		As at		As at		Mar 07		Mar 07
		Mar 07		Sep 06		Mar 06		v. Sep 06		v. Mar 06
		$M		$M		$M		%		%
Deposits and other borrowings by funding type
Customer funding		170,450		158,905		145,602		7	%	17	%
Wholesale funding		40,135		45,889		51,248		-13	%	-22	%
Deposits and other borrowings		210,585		204,794		196,850		3	%	7	%

 

7

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CHIEF FINANCIAL OFFICER’S REVIEW

March 2007 half year compared to March 2006 half year

ANZ recorded a profit after tax of $2,102 million for the half year ended 31 March 2007, an increase of 16% over the March 2006 half year.  Earnings per share increased 15% to 113.2 cents over the March 2006 half year.  After adjusting for non-core items(1) referred to on pages 11 to 12, Cash(1) profit increased 12% to $1,936 million and Cash EPS increased 11% to 104.2 cents.

		Half		Half		Half		Movt		Movt
		year		year		year		Mar 07		Mar 07
		Mar 07		Sep 06		Mar 06		v. Sep 06		v. Mar 06
		$M		$M		$M		%		%
Profit attributable to shareholders of the Company		2,102		1,877		1,811		12	%	16	%
Less: Non-core items(1) (refer to page 13)		(166	)	(21	)	(80	)	large		large
Cash profit(1),(2),(3)		1,936		1,856		1,731		4	%	12	%

 

Profit

		Half		Half		Half		Movt		Movt
		year		year		year		Mar 07		Mar 07
		Mar 07		Sep 06		Mar 06		v. Sep 06		v. Mar 06
		$M		$M		$M		%		%
Net interest income		3,611		3,575		3,368		1	%	7	%
Other operating income		2,002		1,614		1,595		24	%	26	%
Operating income		5,613		5,189		4,963		8	%	13	%
Operating expenses		(2,386	)	(2,346	)	(2,185	)	2	%	9	%
Profit before credit impairment and income tax		3,227		2,843		2,778		14	%	16	%
Provision for credit impairment		(240	)	(183	)	(224	)	31	%	7	%
Profit before income tax		2,987		2,660		2,554		12	%	17	%
Income tax expense		(883	)	(780	)	(742	)	13	%	19	%
Minority interest		(2	)	(3	)	(1	)	-33	%	100	%
Profit attributable to shareholders of the Company		2,102		1,877		1,811		12	%	16	%

 

Profit growth

Profit increased 16% to $2,102 million.  Revenue increased 13% with growth in average interest earning assets offset by reduced margins (-5 basis points), higher fee income from volume growth and pricing initiatives, higher markets income and higher other income from equity accounting earnings and other investments.  Operating expense growth of 9% reflected ongoing investment in the business.  Provision for credit impairment increased 7% with growth in Personal and New Zealand offset by high recoveries in Institutional.

In Australia, profit increased 18% over the March 2006 half year with solid growth across all Personal businesses and higher Institutional revenue, primarily in Markets.  Provision for credit impairment reduced with large recoveries during the March 2007 half.

Profit in New Zealand increased 19% (an increase of 24% in NZD terms) reflecting weaker Markets income and an increase in collective provision charge.  Operating income increased 4% in NZD terms with lending growth of 11% partly offset by a decline in net interest margin of 9 basis points and lower revenue in Markets following the strong performance in the March 2006 half.  Operating expense growth was contained to 2%.

Within Overseas Markets, profit in Asia and Pacific increased 35% and 7% respectively, driven by strong growth in the Institutional business in Singapore, higher equity accounting income in Asia and balance sheet growth in the Pacific.  Profit in the UK and US decreased driven by reduced profit in non–continuing businesses and repatriation of capital, partly offset by revenue growth in the March 2007 half with increased trading income in Markets.

(1)          In the March 2007 half ANZ has classified the profit on sale of Esanda Fleetpartners of $195 million ($141 million after tax) as a significant item.  In the March 2006 half ANZ classified the $113 million ($79 million after tax) settlement of the NHB insurance matter and the $14 million settlement of a dispute with Lloyds TSB over the accounting treatment of certain items in the completion accounts for the acquisition of National Bank of New Zealand Limited (tax on settlement: $nil) as significant items.  ANZ excludes significant items to eliminate the distorting effect of one-off transactions on the results of its core business (refer page 11)

The Group enters into economic hedges to manage its interest rate and foreign exchange risk.  In the March 2007 half ANZ has classified $28 million after tax (Sep 2006 half: $21 million; Mar 2006 half: $13 million) relating to economic hedging as a non-core item (tax impact $13 million (Sep 2006 half: $10 million; Mar 2006 half: $5 million)).  Included in this non-core amount is ineffectiveness arising from designated accounting hedges, any volatility arising from usage of the fair value option and approved classes of derivatives not designated in accounting hedge relationships but that are considered to be economic hedges.  In addition, ANZ has classified a $3 million loss after tax (Sep 2006 half: $nil; Mar 2006 half: $nil) relating to New Zealand revenue hedges that under the transitional provision of AASB 139 (AASB 2005-1) no longer qualify for hedge accounting from 1 October 2006 (tax impact $1 million credit).  ANZ excludes volatility associated with fair value movements on these transactions to provide a better indication of the core business performance (refer page 12)

In the March 2006 half ANZ incurred $26 million after tax from ANZ National Bank incremental integration costs.  Tax on ANZ National Bank incremental integration costs was $13 million.  The integration program was completed in March 2006.  ANZ National Bank incremental integration costs are excluded to better reflect the core cost base and assist analysis of the cost base following completion of the integration

(2)        Refer page 13 for a reconciliation of cash profit to net profit

(3)        Refer pages 11 to 12 for a discussion of why management believes measures of cash profit provide useful information to investors regarding ANZ’s financial condition and results of operations

8

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Cash(1) profit

		Half		Half		Half		Movt		Movt
		year		year		year		Mar 07		Mar 07
		Mar 07		Sep 06		Mar 06		v. Sep 06		v. Mar 06
		$M		$M		$M		%		%
Net interest income		3,611		3,575		3,368		1	%	7	%
Other operating income		1,770		1,583		1,563		12	%	13	%
Operating income		5,381		5,158		4,931		4	%	9	%
Operating expenses		(2,386	)	(2,346	)	(2,259	)	2	%	6	%
Profit before credit impairment and income tax		2,995		2,812		2,672		7	%	12	%
Provision for credit impairment		(240	)	(183	)	(224	)	31	%	7	%
Profit before income tax		2,755		2,629		2,448		5	%	13	%
Income tax expense		(817	)	(770	)	(716	)	6	%	14	%
Minority interest		(2	)	(3	)	(1	)	-33	%	100	%
Cash profit(1),(2),(3)		1,936		1,856		1,731		4	%	12	%

 

Cash profit growth

Cash profit increased 12% to $1,936 million.  Core(1) revenue increased 9% with growth in average interest earning assets offset by reduced margins (-5 basis points), higher fee income from volume growth and pricing initiatives, higher markets income and higher other income from equity accounting earnings and other investments.  Operating expense growth of 6% reflected ongoing investment in the business.  Provision for credit impairment increased 7% with growth in Personal and New Zealand offset by high recoveries in Institutional.

In Australia, cash profit increased 19% over the March 2006 half year with solid growth across all Personal businesses and higher Institutional revenue, primarily in Markets.  Provision for credit impairment reduced with large recoveries during the March 2007 half.

Cash profit in New Zealand decreased 2% (an increase of 2% in NZD terms) reflecting weaker Markets income and an increase in collective provision charge.  Operating income increased 4% in NZD terms with lending growth of 11% partly offset by a decline in net interest margin of 9 basis points and lower revenue in Markets following the strong performance in the March 2006 half.  Operating expense growth was contained to 2%.

Within Overseas Markets, cash profit in Asia and Pacific increased 40% and 7% respectively, driven by strong growth in the Institutional business in Singapore, higher equity accounting income in Asia and balance sheet growth in the Pacific.  Cash profit in the UK and US decreased driven by reduced profit in non–continuing businesses and repatriation of capital, partly offset by revenue growth in the March 2007 half with increased trading income in Markets.

(1)          Refer to footnotes 1 to 3 on page 2

(2)          Refer page 13 for a reconciliation of cash profit to net profit

(3)          Refer pages 11 to 12 for a discussion of why management believes measures of cash profit provide useful information to investors regarding ANZ’s financial condition and results of operations

9

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Profit drivers

Profit after tax increased 16% over the March 2006 half year and Cash(1) profit increased 12% over the March 2006 half year.  For a discussion of the impact of non-core items refer pages 11 to 12.  Key influences on profit are shown below.

Net interest ñ7% - Adjusted for non-core items(1), (2)ñ7%:

Net interest income was driven by growth of 10% in average interest earning assets (11% excluding the impact of exchange rates) with strong growth in New Zealand (9%, or 13% excluding exchange rate impact) and Personal (12%).  Average deposits and other borrowings grew 6% (8% excluding exchange rates) following strong growth in Institutional (14%), Personal (11%) and New Zealand (1%, or 5% excluding exchange rates).  Volume growth was offset by a 5 basis point decline in margin, primarily from competitive pressures.

Other income ñ26% - Adjusted for non-core items(1), (2)ñ13%:

Adjusted for non–core items, other income growth was underpinned by volume growth initiatives, strong Markets income and increased equity accounting income and a $27 million profit on the sale of MasterCard shares.

Operating expenses ñ9% - Adjusted for non-core items(1), (2)ñ6%:

Operating expense growth was primarily due to annual salary increases and a 7% increase in staff numbers, largely in Personal and Institutional, as we continue to invest in the business.

Provision for credit impairment ñ7% - Adjusted for non-core items(1), (2)ñ7%:

Individual provisions were unchanged with an increase in Personal due to higher provisions primarily in the Cards portfolio, offset by Institutional with lower provisions raised and higher recoveries.  The collective provision charge increased by $16 million driven largely by different trends in risk levels in New Zealand’s ANZ Retail and strong volume growth in Corporate & Commercial and volume increases in Institutional, partially offset by a reduction in Personal from moderating portfolio growth in Consumer Finance.

Income tax ñ19% - Adjusted for non-core items(1)ñ14%:

The increase in tax expense is driven by growth in profit before tax and an increase in the effective tax rate by 0.5% reflecting the run-off of certain structured finance transactions.

(1)          Refer footnotes 1 to 3 on page 9

(2)          Refer footnote 1 on page 9

10

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March 2007 half year compared to September 2006 half year

The Group recorded a profit after tax of $2,102 million for the half year ended 31 March 2007, an increase of 12% over the September 2006 half.  Basic earnings per share increased 11% (11.6 cents) to 113.2 cents.

Cash profit(1) increased 4% over the September 2006 half which reflects seasonality in the halves and higher provisions for credit impairment.  Cash earnings per share (refer page 24) increased 4% (3.7 cents) to 104.2 cents.

Operating income increased 8% assisted by the profit on sale of Esanda Fleetpartners.  After adjusting for non-core items, operating income increased 4%.  Net interest income increased 1%, impacted by a reduction in interest income on revenue hedges ($50 million or -3 basis points) and lower net interest income on derivative transactions ($35 million offset in other income).  Average interest earning assets grew 6%, primarily in Personal and New Zealand, which was partially offset by a decline in net interest margin of 6 basis points (excluding the impact of revenue hedges).  Other income increased 12% reflecting increased profit on trading instruments in Institutional, which includes unrealised gains which are partly offset in net interest income.  Operating expense growth was contained to 2% following the strong growth in the September 2006 half.

(1)          Refer footnotes 1 to 3 on page 9

Non-core items

In order to calculate cash profit, ANZ has adjusted the income statement for non-core items, as outlined below, to assist in understanding the core business performance by removing the volatility in reported results created by one-off significant items, ANZ National Bank incremental integration costs which ceased in the half year March 2006, and the timing differences in the recognition of fair value gains in profit on ineffective hedging contracts.  Cash profit is a key performance measure used by the investment community and ANZ’s Australian peers.

Non-core items in the income statement

		Half		Half		Half		Movt		Movt
		year		year		year		Mar 07		Mar 07
		Mar 07		Sep 06		Mar 06		v. Sep 06		v. Mar 06
		$M		$M		$M		%		%
Significant items
Sale of Esanda Fleetpartners		141		—		—		n/a		n/a
Settlement of ANZ National Bank claims		—		—		14		n/a		-100	%
Settlement of NHB insurance claim		—		—		79		n/a		-100	%
Total significant items		141		—		93		n/a		52	%
Ineffective hedge fair value gains/losses		28		21		13		33	%	large
NZD revenue hedge mark to market volatility		(3	)	—		—		n/a		n/a
ANZ National Bank incremental integration costs		—		—		(26	)	n/a		-100	%
Non-core items		166		21		80		large		large

 

·            Significant items

Significant items in the income statement are those items that management believe do not form part of the core business by virtue of their magnitude and infrequent nature and, as such, should be removed from profit when analysing the core business performance.  The following are considered significant items:

·        Sale of Esanda Fleetpartners (March 2007 half year)

During the March 2007 half ANZ sold Esanda Fleetpartners, which had operations in Australia and New Zealand, to Nikko Principal Investments in Australia.  Profit on disposal was $195 million ($141 million after tax) with $128 million ($74 million after tax) recognised in Australia and $67 million ($67 million after tax) recognised in New Zealand.

·        Settlement of the NHB insurance claim (March 2006 half year)

During the March 2006 half ANZ settled its $130 million claim against a number of reinsurers in relation to the National Housing Bank (NHB) matter.  ANZ has reported the $113 million ($79 million after tax) cost recovery as a significant item in 2006.  $1 million was received in 2005 and not treated as significant as it was immaterial.

·        Settlement of ANZ National Bank claims (March 2006 half year)

Following the purchase of National Bank of New Zealand Limited on 1 December 2003, a dispute arose with Lloyds TSB in relation to the accounting treatment in the Completion Accounts of the provision for retirement gratuities.  The dispute was referred to arbitration and, as a result, ANZ National Bank received $14 million in March 2006 ($14 million after tax) in final settlement.

11

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·            Volatility resulting from the application of hedge accounting

The Group enters into economic hedges to manage its interest rate and foreign exchange risk.  The implementation of AIFRS accounting policies on hedge accounting from 1 October 2005 (1 October 2006 in respect of hedges of NZD revenue) introduced volatility within the Income Statement in respect of ineffective hedges as follows:

·        ineffectiveness of designated accounting cash flow and fair value hedges; and

·        approved classes of derivatives not designated in accounting hedge relationships but that are considered to be economic hedges.

ANZ has separately reported the impact of volatility due to hedge ineffectiveness as a non-core item as the profit reported on hedge transactions is asymmetrical to the treatment of the hedged item and will reverse over time and as such is not part of the core operating performance.  During the March 2007 half year ANZ has classified $25 million after tax (Sep 2006 half: $21 million; Mar 2006 half: $13 million) relating to ineffective hedging and, from 1 October 2006, NZD revenue hedges as non–core items (tax on hedges $12 million (Sep half 2006: $10 million; Mar 2006 half: $5 million)).

		Half year Mar 07 $m		Half year Sep 06 $m		Half year Mar 06 $m
Ineffective hedge fair value gains (income statement)
Non-compliant hedges		40		18		27
NZD revenue hedges		(5	)	—		—
Ineffective portion of effective cash flow and fair value hedges		2		13		(9	)
Volatility resulting from the application of hedge accounting (before tax)		37		31		18
Volatility resulting from the application of hedge accounting (after tax)		25		21		13

 

On transition to AIFRS at 1 October 2005, the life to date impact of hedge ineffectiveness and economic hedges not designated in accounting hedge relationships was $144 million (pre–tax).  This amount was taken directly to retained earnings as a loss.

		$m
Net unrealised loss (balance sheet)
As at 1 October 2005, transition to AIFRS		(144	)
Net volatility recorded in income statement
-half year ended 31 March 2006		18
-half year ended 30 September 2006		31
-half year ended 31 March 2007		37
Net unrealised loss 31 March 2007		(58	)

 

The net volatility recorded in the income statement represents the progressive reversal of the $144 million loss on transition to AIFRS together with volatility arising on existing and new ineffective hedge transactions.

·            ANZ National Bank incremental integration costs

Expenditure on the integration of ANZ National Bank, which was completed in March 2006, included both the reallocation of existing resources to integration and incremental integration costs.  Incremental costs were those costs that did not recur once integration was completed and thus did not form part of the core ongoing cost base.  During the March 2006 half year $26 million after tax or $39 million before tax of incremental integration costs was incurred.

12