February 18, 2008
ANZ Banking Group led a share market run on the big banks after it surprised investors by revealing a worse-than-expected exposure to potential bad corporate debts.
Australia's third-biggest bank said a higher provisions charge to cover potential bad loans - headlined by a one-off $US200 million ($A220.68 million) exposure to a US bond insurer - was now so large it would ``offset'' strong profit growth.
The ANZ's trading update came only a week after the Commonwealth Bank (CBA) delivered interim earnings that fell short of expectations.
Like CBA, ANZ blamed its profit problems on the higher cost of wholesale funding and the need to put more money aside to cover bad corporate loans.
Investors cut ANZ's share price by $1.45, or 6.06% to $22.46 by the close of trading, and punished the other big banks.
It was the lowest closing level since it ended at $21.90 on September 2, 2005.
ANZ pencilled in a potential $US200 million loss on its exposure to ACA Capital Holdings after the US monoliner had its credit rating slashed last year.
Like other US-based bond insurers, ACA Capital has run into grief with its CDOs (collateralised debt obligations), which had some US subprime mortgage liabilities.
Adding to the ANZ's provision pain was a rating downgrade for one of its commercial property clients, resulting in an extra $90 million provision charge.
The property client is believed to be struggling supermarket owner Centro Properties Group.
UBS has estimated that ANZ had a $500 million unsecured exposure to Centro, a $700 million secured exposure and a $150 million exposure to US-based lender Countrywide.
ANZ posted another $51 million one-off provision to cover Lafayette Mining Ltd, which went into administration last year after a series of problems at its mine in the Philippines .
Grilled by industry analysts during a briefing today, ANZ boss Mike Smith was adamant his bank had no direct exposure to the US sub-prime mortgage crisis.
''For ANZ to experience an actual loss on this exposure (to ACA Capital) it would require a significant number of what is a large and well-diversified portfolio of corporate names to go belly-up around the world,'' he said.
''If that happens we're looking at an Armageddon situation. Really we would be the last thing you would have to worry about if that happened.''
Mr Smith said he expected that ANZ would eventually end up ``writing back most, if not all of this provision''..
The bank's underlying business was in good shape, he said. ``It's no surprise to anyone that credit costs have risen.
''They have been well below normal for quite some time and that was clearly unsustainable. The credit cycle has changed.''
ANZ was likely to increase revenues ``a little faster'' than many expected and, if anything, its revenue momentum was actually accelerating, Mr Smith said.
On the industry front, Mr Smith said the Australian banking system was standing up to the international credit crunch much better than European and US lenders.
''I would recommend all of you to visit London and New York in the near future just to see the effect of what is really happening there,'' he said.
''This is a financial services bloodbath. The Australian banking system is in remarkably good shape in comparison.''
So far this financial year, ANZ has raised term wholesale funding of $12 billion and is on track to meet its full-year term funding target of at least $25 billion.
The cost of the funding increased significantly and had only been partially offset by higher interest rates for customer lending, the bank said.
ANZ last month increased its variable rate for home loans by 20 basis points independently of the central bank..
ANZ said consumer credit quality in Australia remained solid, with low arrears and actual losses modestly below initial expectations.
Paul Xiradis, chief executive at fund manager Ausbil Dexia Ltd, said the ANZ's revelations had caught the market by surprise.
''We've seen the market react negatively as a consequence of that,'' Mr Xiradis said.
''It's bringing down the whole of the banking sector and raising concerns about the banks' exposure to these one-off factors.''