The result was underpinned by a 5 per cent cut in operating expenses to A$1.64 billion. Meanwhile, total net operating income rose 2 per cent to A$2.95 billion. Most of the growth stemmed from Australia and New Zealand, where net profit rose 29 per cent and 46 per cent, respectively, offsetting a 26% drop in profit from international operations to A$134 million.

Earnings per share, fully diluted, rose to 44.6 Australian cents from 41.1 cents, and the bank increased its interim dividend to 26 cents from 24 cents.

Looking ahead, chairman Charles Goode said the bank expects even better earnings in the second half. He forecast a profit of at least A$1.43 billion.

The bank could also return funds to shareholders, given that it has excesscapital, no plans to make a major acquisitions, and a focus on internal growth over the next three years, Chief Executive John McFarlane told reporters.

The earnings are "quite good," said Graham Maloney, a banking analyst at Macquarie Equities Ltd. He added that he plans to raise his forecast of fiscal year profit and will keep recommending ANZ as an "outperform" stock to his clients.

James Falkiner, an analyst at HSBC Securities Australia Ltd., said he was unimpressed with the earnings, and that he will keep a "reduce" recommendation on the stock.

The market was hoping the bank would give some indication that it is seeing relief from emerging-market asset-quality problems, it will make some acquisitions and buy back some of its shares. However, investors didn't get any such news, Falkiner said.

McFarlane said there are "one or two" acquisitions in the Australian financial services industry the bank is considering, and that a share buyback is also under consideration.

"If we can't see anyintelligent way to use this capital, then we won't run a capital excess, we will return it to shareholders," he said. The chief executive added that ANZ is on track to meet annual performance targets, including double-digit earnings growth, a 20% return on shareholder equity, a cost-to-income ratio of 53% by 2000 and a reduced risk profile.

In the first half, return on equity climbed to 17.3 per cent from 17.1 per cent a year ago, while the cost-to-income ratio fell to 55.8 per cent from 59.9 per cent. ANZ, which is more heavily exposed to Asia than its Australian rivals, said total lending and other exposures to Asia (excluding South Asia) was US$5.77 billion at the end of March, down US$297 million from the end of September.

However, gross impaired assets from international markets rose to A$834 million from A$694 million, the HSBC analyst said. McFarlane said ANZ wants to focus more on Asia and the Pacific, and exit other markets, though he decined to specify which markets. In addition, ANZ willbroaden its operations beyond traditional banking services and emphasize retail customers and domestic markets over business customers and international markets.