Conservative Holding Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) is a charter member of the Australian Edge Portfolio, one of the original “Eight Income Wonders From Down Under” we introduced in our first issue on Sept. 26, 2011.

Through May 15, 2014, ANZ has generated a total return in US dollar terms of 102.4 percent.

In the time since we last profiled Australia’s third-largest bank in terms of market capitalization as a “Sector Spotlight”–thereby recommending it as one of two monthly “best buys” for new money–in the July 2013 issue it’s up 25.69 percent.

ANZ hit an all-time high of AUD34.94 on the Australian Securities Exchange (ASX) on April 28, 2014, but has backed up a bit in the aftermath of management’s report on fiscal 2014 first-half financial and operating results.

The analyst community is concerned about short-term pressure on margins, expense growth and the sustainability of its Asia-focused growth plan.

We’re high on ANZ precisely because of the long-term benefits of its Asia exposure, which is tops among a peer group that includes Commonwealth Bank of Australia (ASX: CBA, OTC: CBAUF, ADR: CMWAY), National Australia Bank Ltd (ASX: NAB, OTC: NAUBF, ADR: NAZBY) and Westpac Banking Corp (ASX: WBC, NYSE: WBK).

Management reported statutory net profit after tax (NPAT) of AUD3.4 billion, up 15 percent from the prior corresponding period, which cash profit–which is statutory NPAT excluding non-core items and reflects ongoing activities– grew by 11 percent to AUD3.5 billion.

Earnings per share (EPS) were up 10 percent to AUD1.29. Management confirmed an AUD0.83 per share interim dividend, representing a 13.7 percent increase over the AUD0.73 interim dividend paid in respect of fiscal 2013 first-half results.

The increased dividend reflects ANZ’s stronger performance and a gradual rebalancing toward a more even split between the interim and final dividend amounts. Management policy is a payout ratio toward the upper end of the 65 percent to 70 percent of cash profit range, though the AUD0.83 rate represents just 64.3 percent of first-half EPS.

The cost-to-income ratio improved another 20 basis points to 44.3 percent, while return on equity was steady at 15.5 percent. Customer deposits grew by 13 percent, as net loans and advances were up 12 percent. A provision charge for bad loans of AUD528 million was 12 percent lower than that for the prior corresponding period, as the quality of the portfolio continues to improve across the bank’s operations.

Management continues to expect the provision charge for fiscal 2014 will be around 10 percent lower than for fiscal 2013, though it maintains a strong provision balance.

Gross impaired assets decreased 23 percent. Impaired assets were down 32 percent over the last two years, and are lower than at any point since September 2008 despite 46 percent growth in the lending book in that time.

In International and Institutional Banking 77 percent of Institutional customers are now rated investment grade, up from 60 percent in 2008, and this continues to drive significant reductions in impaired assets.

ANZ remains well capitalized, with an Australia Prudential Regulation Authority Common Equity Tier 1 ratio as of March 31, 2014, of 8.33 percent, or 10.5 percent on an internationally harmonized Basel III basis.

Results for the six months ended March 31, 2014, continue to demonstrate consistent progress on ANZ’s long-term strategy to grow in its core franchises in Australia and New Zealand, to build a significant and profitable franchise in Asia Pacific and to establish efficient infrastructure and processes that improve productivity and reduce risk.

Management noted that its international efforts, particularly Asia, are “firing on all cylinders,” as revenue and profit grew by solid rates.

Profit from International and Institutional in Asia Pacific, Europe and Americas (APEA) was up 43 percent based on significant growth in customer numbers and in products that support regional trade and investment flows such as foreign exchange, cash management and trade finance.

Overall International and Institutional Banking profit grew 9 percent, with income up 4 percent and expenses up 3 percent, along with further credit quality improvements driving provisions down 18 percent.

ANZ continues to diversify its earnings, with 52 percent of income now coming from outside Australia and New Zealand.

ANZ has generated a compound annual growth rate of 37 percent over the six years since the launch of its greater-Asia-focused strategy. ANZ is now being consistently rated a top four Corporate Bank in Asia by Greenwich Associates, evidence of its solidifying presence.

In its core domestic operation execution of the “Banking on Australia” program–built around simpler products, streamlined processes and better distribution capability–has driven growth in customer numbers. ANZ added 110,000 net new customers across Retail and Commercial in the last year, while simultaneously reducing average monthly customer complaints by 9 percent.

ANZ has established greater scale based on market-share growth in home lending, small-business lending and retail deposits.

Business confidence in Australia is recovering more slowly than expected, however, and in some segments growth remains subdued, with competition placing pressure on margins. But costs have been well managed.

The Australia unit grew profit 5 percent, reflecting 4 percent income growth, a 2 percent increase in expenses and a 4 percent increase in provisions for bad loans. Lending grew by 6 percent, with customer deposits up 7 percent.

ANZ had the strongest home loan growth of the major banks over the past year and has grown home loans at above-system rates for 17 consecutive quarters. Small Business Banking has performed particularly well, with lending up 16 percent.

New Zealand operations appear to have turned around, as ANZ’s move to a single brand and technology platform, together with New Zealand’s economic recovery, drove volume growth, improved productivity and lower provisions.

The New Zealand division grew profit 21 percent, driven by market-share growth, productivity and credit-quality improvements. Expenses were down 6 percent, and the provision charge declined by NZD73 million. Lending grew 5 percent, with customer deposits up 7 percent.

ANZ is now No. 1 for new mortgages in all of the larger New Zealand cities, including Christchurch and Auckland.

Global Wealth revenue growth was solid, driven by solid growth in funds under management, as an effort to integrate wealth-management solutions with traditional banking services and offer more options for self-directed customers is bearing fruit.

Global Wealth grew profit by 11 percent, with operating income up 8 percent and expenses up 7 percent. Underlying performance was driven by growth in funds under management (FUM) and in-force insurance premiums as well as an improved claims and lapse experience, with retail lapse rates in Australia declining a further 120 basis points.

Private Wealth grew operating income by 28 percent, with customer deposits up 26 percent and lending up 4 percent.

The Global Markets business, which services customers’ foreign exchange, interest rate management and commodities needs, delivered another strong result, with income up 5 percent. Income from Asia-based customers increased 34 percent, with particularly strong sales for foreign exchange services.

Institutional and Commercial customer numbers grew 12 percent. ANZ’s commercial operation has grown across all regions, with overall growth faster than system year to date. Small Business Banking has been particularly strong, up 14 percent driven by growth in customer numbers, which were up 29 percent on the prior corresponding period.

Australia & New Zealand Banking Group is a buy under USD34 on the Australian Securities Exchange (ASX) using the symbol ANZ and on the US over-the-counter (OTC) market using the symbol ANEWF.

ANZ also trades on the US OTC market as a Level I, sponsored American Depositary Receipt (ADR) under the symbol ANZBY. ANZ’s US OTC-traded ADR represents one ordinary, ASX-listed share. ANZ’s ADR is a buy under USD34.

ANZ closed at AUD33.20 on the ASX on May 15, 2014, equivalent to USD31.04 based on the prevailing Australian dollar-US dollar exchange rate.

The bank’s fiscal year runs from Oct. 1 to Sept. 30. Management reports full financial and operating results twice a year; it typically posts first-half results–for the six months ending March 30–in late April, with full fiscal-year numbers out in late October.

Interim dividends are typically declared several weeks ahead of management’s report on first-half results. Final dividends are usually declared in January, though the specific amount of the payment is announced along with full-year results.

ANZ’s board confirmed an interim dividend of AUD0.83 on May 1, when it announced fiscal 2014 first-half results. It will be paid July 1, 2014, to shareholders of record as of May 13, 2014. Shares traded “ex-dividend” on this declaration as of May 9, 2014.

A final dividend will be declared on Oct. 31, 2014, when ANZ reports full fiscal-year results. It will likely be paid Dec. 16, 2014, to shareholders of record as of Nov. 11, 2014. ANZ paid a AUD0.91 final dividend for fiscal 2013, which was up 15.2 percent from fiscal 2012.

Nine analysts that cover ANZ rate the stock a “buy,” while eight rate it “hold.” There are three “sell” recommendations on the stock.

The average 12-month target price among the 15 analysts that provide a figure is AUD34.09, with a high of AUD38 and a low of AUD29.17.  Based on a May 15, 2014, closing price of AUD33.20 on the ASX, the implied one-year total return, including the present annualized dividend rate of approximately AUD1.74 per share, is 7.9 percent.

Dividends paid by ANZ are “qualified” for US tax purposes. Based on the “fiscal cliff” compromise reached in Washington, DC, in early January 2013 dividends will be taxed at Bush-era rates of 5 percent to 15 percent for investors’ first USD450,000 a year of income for couples and USD400,000 for single filers. Above that the maximum tax rate is 20 percent.