Australia and New Zealand Banking Group has reported a 42 per cent drop in full-year cash profit after loan losses increased due to economic challenges triggered by the COVID-19 pandemic.

Australia’s fourth-largest bank set aside a further $1.06 billion, 36 per cent less than the amount set aside in the first half, largely to beef up credit reserves in light of the hit from the virus outbreak, taking its full-year provisions to $A2.74 billion.

With the Australian economy in its first recession in three decades and wage growth crawling at its weakest pace on record, banks’ growth prospects and margins are under pressure amid record-low interest rates and more debt likely going bad.

ANZ’s cash profit from continuing operations was $3.76 billion for the year ended September 30, compared with $6.47 billion a year earlier.

But the result beat an estimate of $3.51 billion, according to a Reuters poll of eight analysts.

The lender also declared a final dividend of 35 cents per share, down from last year’s payout of 80 cents per share.

ANZ’s move to declare a lower dividend was in line with a directive by regulators, insisting the payout be less than half the profit for the rest of the year.

The second-half’s payout ratio was 35 per cent of cash profit.

“Events of the last 12 months make it difficult to predict the course of the next year,” CEO Shayne Elliott said on Thursday.

ANZ’s common equity tier 1 ratio, a closely watched measure of its spare cash, rose to 11.3 per cent at the end of September, up from 11.1 per cent as of June 30.

Its net interest margin was unchanged at 2.59 per cent.