Australia & New Zealand (ANZ) Banking Group, Australia’s third-largest lender by market capitalisation, warned yesterday its earnings are likely to be hurt this fiscal year by fallout from the global tightening of credit.
ANZ said it plans to take higher provisions for potential bad debts, including a US$200million (Dh734m) charge for exposure to a United States insurer, that will “offset” profit growth. That growth, however, was on track to exceed the 11.5 per cent achieved in 2007.
It will also make a A$90m (Dh301m) provision for exposure to an unnamed Australian property group – which analysts expect is Centro Properties – and a A$51m provision for an unnamed failed miner.
“In the first four months of trading, good performances from Personal and Asia, a turnaround in Institutional and solid returns from New Zealand have been overshadowed by higher credit costs on commercial lending,” said Chief Executive Mike Smith.
The bank’s surprise warning spooked investors, sending stocks in the financial sector sharply lower. Australian banks do not have any direct US sub-prime mortgage exposure, but traders said ANZ’s update shows that lenders are not immune from shock waves spreading around the world from the loan crisis.
Defaults on risky US housing mortgages have ended up costing investment banks – including Citigroup, Merrill Lynch and UBS AG – billions of dollars and have led to fears that companies, such as MBIA and Ambac Financial Group, that insure bonds based on the so-called sub-prime loans, may fail.
ANZ’s warning comes just days after the Commonwealth Bank of Australia booked higher-than-expected provisions for potential bad debts for the six months to December 31 due to a number of single-name exposures, including one to Centro Properties.
“The news has clearly increased the risk of further sector de-rating when coupled with CBA’s recent market announcement,” analysts at Macquarie Research said in a research note.
“So while ANZ continues to maintain strong operations, it may take some time for negative sentiment to disseminate... for the Australian financial sector.”
For the fiscal year through September 2007, ANZ reported a net profit of A$4.18 billion. Analysts on average forecast a profit of A$4.39bn for the 2008 financial year, according to Thomson One Analytics.
ANZ said it expects to write back a significant portion of the US$200m taken against the United States monoline insurer, which has a CCC rating, in future periods.
Smith said the exposure to the insurer did not involve sub-prime assets, but “some credit intermediation trades for high-quality corporate portfolios”.
Smith said ANZ also has credit protection intermediation arrangements with a number of AA-rated or better related counterparties.
Smith said the bank was not experiencing a “systematic deterioration” in credit quality and the group’s consumer credit portfolio was “very clean”.
“Looking at the global environment more broadly, this is a financial services bloodbath and I think the Australian banking system overall is in remarkably good shape in comparison,” Smith said.
He said the group’s underlying performance remains solid.
A$90m: Is the amount ANZ has set aside to make a provision for exposure to an unnamed Australian property group – which analysts expect is Centro Properties.
A$51m: Is the provision ANZ has made for an unnamed failed miner.
$200m: The amount ANZ took against the US monoline insurer, which has a GCC rating. The bank said it expects to write back a significant portion of this amount.
Credit crisis to hurt ANZ profit margins