Optimism In Among The Debt Woes

Sydney Morning Herald
25 October 2008
Danny John

ANZ Bank and its main Australian rivals face the biggest test of their extensive loan books in 20 years as bad debts mount and capital becomes harder to find as a result of the global credit crisis.

Industry analysts were united yesterday in their verdict on the substantially lower profit announced by ANZ: the banking sector is in for a tough 2009, caught between rising impairment charges, slowing credit growth and falling margins.

But the Melbourne bank won the praise of market watchers for moving early in putting aside up to $2.7 billion to cover the rising defaults on its extensive loan book, even though its cash profits for this year fell 23 per cent to just over $3 billion as a result.

Investors were also relieved to see that ANZ's underlying revenue growth was up 12 per cent year on year to $12.3 billion. If maintained, they say, the country's fourth largest bank should be able to resume its profit growth despite the sharply slowing domestic economy.

But analysts are split on the prospects for a significant earnings recovery next year and estimate net profits ranging from $3.3 billion to $3.8 billion.

Cash earnings per share are expected to come back after a 26 per cent decline to 155.3 cents a share, in the financial year to September 30, but the improvement won't be as much as initially anticipated, and most forecasts have been scaled back because of the tougher operating conditions.

Nonetheless, ABN Amro analysts said that the past 12 months should prove to be the bottom of ANZ's earnings slump, during which the bank recorded its first fall in profits for 10 years.

"In our view ANZ is by far and away the best provisioned of the major (domestic) banks," said the research house, which reckons that ANZ has an extra $700 million set aside than its peers as a buffer to any further loan write-down setbacks.

A similar belief was expressed by Macquarie Equities, although it highlighted rising credit risks and a slowing of lending growth as particular threats to the bank's forthcoming earnings.

"Ultimately, the next 12 months will see loan books face their biggest test of quality in almost two decades," Macquarie's analysts wrote in a research note to clients yesterday.

There was also a warning from Deutsche Bank that ANZ's impaired assets were "materially higher" than its three biggest rivals, Commonwealth, Westpac and National Australia, which pointed to the possibility of future loan losses.

The mixed response came as ANZ's shares slipped a further 2.5 per cent yesterday, or 46c, to $17.55.

This followed a 5 per cent fall that accompanied its results presentation.

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