Once Bitten, But Anz Won't Be Shy To Reassert Itself In Face Of Credit Crisis

The bank dusts itself off after a stumble and instead of ducking for cover, looks for opportunity.

ANZ's news that a solid trading performance this year has been marred by increased provisions, including a $US200 million provision against a monoline-insured loan portfolio, continues this market's education about the pervasive impact of the global liquidity crisis.

The loans in question were part of a series of debt-based trades that ANZ entered into between 2005 and February last year.

The role of the monoline insurers in such deals was to insure debt, and in effect, act as a guarantor of loan values. The flaw, exposed worldwide by the debt crisis, was that the ratings the monoline insurers were guaranteeing depended on the credit ratings that the monolines themselves enjoyed.

And now, as the global credit crisis forces write-downs of bond asset valuations, the insurers face payouts that could wipe out their own capital bases. Their survival probably depends on a government-organised rescue, and as rating agencies downgrade them as credit risks, the bonds and notes they have insured are also being downgraded, to reflect higher risk that the guarantee they have given in the past are either worth less, or worthless.

ANZ CEO Mike Smith said yesterday that in all probability, the $US200 million provision will probably prove unnecessary, and he is likely to be proven correct.

ANZ has totally written down the value of the monoline insurance on the debt, and is, in effect, providing $US200 million against a double financial fatality.

Firstly, the collapse of the monoline insurer involved, ACA, and the reassumption of direct exposure to the loans by ANZ: and secondly, a series of corporate crashes among the borrowing corporations, which in the deals provisioned are predominantly in the US and Europe.

Smith said yesterday the debt involved was of higher quality than ANZ's own corporate loan book, and said 20% of the "names" in the loan portfolio would have to default before the ANZ's balance sheet began to take a hit, an unlikely scenario.

The short to medium impact is real, however, and Smith says ANZ won't be repeating the debt bundling exercises in question, which produced only sliver-thin trading margins. While the $US200 million ANZ has set aside will probably be written back into profits over time, that provision, a general provision of $90 million on a property company that is believed to be related to Centro (Centro is a work in progress, which is why ANZ is not making a specific provision) and a $51 million individual provision against a resources sector loan will all be charged against ANZ's earnings in this half-year, depressing the group's accumulated earnings, and through that, its capital resources.

Smith's plain talking about the dimensions of the credit crisis will inject more reality into the markets about the crisis. He told analysts yesterday morning that everybody should go to New York or London to see the dimensions of the 'bloodbath", because the view from here was distorted by the fact that local credit markets were holding up much better.

But he said he believed the crisis offered more opportunity than risk to the still-robust Australian banks - and he could be correct in the longer term.

Bank profit margins are being squeezed by the crisis, but if they can fund the demand, the banks will win market share as corporate borrowers return from the distressed securitisation markets.

And Smith's own plans to expand, with an eye to creating a regional, more growth-oriented presence will only be seriously hurt if the value proposition ANZ offers weakens relative to its peers. So far that has not happened.

ANZ led the big Australian bank share prices down yesterday, as investors reacted to Smith's new profit guidance, but ANZ's 18.2% share price decline in 2008 still compares well with NAB, whose shares are down almost 22%, Commonwealth Bank, whose shares are down 25.5%, and Westpac, whose shares have lost 19.4%.

All are down more heavily than the market at large - the S