SYDNEY (Reuters) -ANZ Group ( ANZGF ) flagged it faces margin pressure after reporting a 14% drop in annual cash earnings hurt by legal penalties and layoff expenses, but the bank said it planned to cut costs this year, sending its shares up on Monday.

ANZ, the country's fourth-largest lender by market value, posted cash profit of A$5.79 billion ($3.76 billion) for the year ended September 30, missing a Visible Alpha consensus estimate of A$6.17 billion and below last year's A$6.73 billion.

Most of the profit decline was driven by a A$1.11 billion post-tax profit hit, including A$414 million from 3,500 staff redundancies, and A$264 million in penalties to settle its lawsuit with the securities regulator.

Chief Executive Nuno Matos, the former HSBC executive who took the helm in May, said the bank needed to do better against its bigger rivals.

"The results we have announced today demonstrate our franchise is strong, but action is needed," Matos said.

"As we deliver our strategy, we will accelerate growth and outperform the market, while delivering more for our customers."

ANZ shares rose 2.6% in morning trade on Monday, outperforming a 0.3% rise in the benchmark S&P/ASX200 index.

The rise in shares came after ANZ forecast a 3% reduction in total costs for the 2026 financial year and its core equity tier one capital exceeded analysts' expectations.

HOME LOAN WAR CRIMPS MARGINS

Cash profit at the bank's Australian retail and institutional lending divisions fell 35% and 9%, respectively, as margins contracted despite growth in lending and deposit volumes.

The Reserve Bank of Australia's three interest rate cuts this year have boosted the housing market, on which the country's banks are heavily dependent. However, competition to sell cheaper home loans has impacted their margins, as seen in results from Westpac and National Australia Bank.

ANZ said its net interest margin declined by 2 basis points from a year earlier to 1.55%.

"There are potential headwinds, including the impact of further central bank rate reductions and ongoing competition," ANZ's chief financial officer, Farhan Faruqi, said on a call with analysts.

He said the bank would continue to manage its margins through changes in pricing and its mix of loans and funding.

CEO Matos is pushing to streamline ANZ's core business units and repair its risk culture following a turbulent year, in which the bank absorbed a record regulatory penalty, laid off thousands of workers and faced mounting costs to integrate Suncorp Bank.

ANZ in September agreed to pay A$240 million, the Australian corporate regulator's largest-ever penalties against a single entity, over systemic failures ranging from acting "unconscionably" in a government bond deal to charging dead customers.

Those troubles contributed to former CEO Shayne Elliott being stripped of a A$13.5 million bonus for the past year, according to the bank's annual report.

The board said a zero bonus for Elliott was "appropriate for 2025 having regard to the overall performance of the Group, and his accountability as the former CEO for the various non-financial risk matters".

ANZ declared a final dividend of 83 Australian cents per share, the same as last year.

($1 = 1.5389 Australian dollars)