Anz Faces Grilling On Bad Loans

Sydney Morning Herald

Monday April 21, 2008

Stuart Washington

MIKE SMITH, ANZ's chief executive, will be forced to come to terms with the bank's first underlying profit slump in more than a decade, with analysts forecasting a fall to $1.6 billion - more than 10 per cent below its first-half result last year.

Also galling for the incoming chief executive is the fact he will preside over ANZ's new status as the worst performer in terms of bad loan provisions when he presents the bank's half-year results on Wednesday.

It will be the first major results briefing since the bank's large exposures to Centro and troubled stockbrokers Tricom and Opes Prime became widely known.

As a result, the one-time market darling headed by genial Scotsman John McFarlane has borne the brunt of broker scrutiny as it attempts to explain its recent announcement of bad loan provisions of $975 million, up from $240 million in the first half last year.

Deutsche Bank analyst Ross Brown said in a report released on Saturday: "[The bad loan provision] is likely to be much higher than peers' and as such gives little comfort on future loan losses given potential for a deteriorating economic environment in Australia and NZ."

Last week leading broking analyst Brian Johnson of JPMorgan warned that the whole banking sector could face profit downgrades of between 25 per cent and 35 per cent if there was a sharp escalation in loan losses.

JPMorgan lifted its recommendation on ANZ to overweight last week, after two previous earnings downgrades. But it warned the bank faced challenges including Mr Smith's stated intention of rapidly expanding in Asia, its 30 per cent of profits sourced from New Zealand, and its heavy reliance on mortgage brokers.

JPMorgan has previously estimated ANZ's exposure to troubled companies stood at $2.4 billion, with its problem loans including Centro, ACA and ABC Learning. About $881 million of this is unsecured.

But the main damage to ANZ's reputation has been its association with Tricom and Opes Prime, lending to brokers who were financing loans against small and illiquid companies. Its loan to Tricom was about $500 million and its exposure to Opes Prime was about $650 million.

Reports also put ANZ as a large lender to Chimaera Capital, a Melbourne stock lending firm that reportedly uses the same business model as Tricom and Opes Prime.

The bank has set up an internal inquiry into its behaviour in lending to Opes Prime, and has promised to make the findings public.

A bright spot for ANZ will be a $350 million pre-tax gain from its stake in the Visa float, but this will not be seen by analysts as contributing to underlying earnings.