Opes And Bad Loan Provisions Eat Into Anz

The Age
21 April 2008
Stuart Washington, Sydney

ANZ chief executive Mike Smith will have to come to terms with the bank's first underlying profit decline in more than 10 years on Wednesday, with analysts forecasting profit will fall to $1.6 billion. This would be more than 10% below its first-half result last year.

Also galling for the recently appointed CEO is that he will preside over ANZ's new status as the worst performer in terms of bad loan provisions when he presents half-year results on Wednesday.

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

As a result, the one-time market darling, previously 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 yesterday: "(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% and 35% if there was a sharp rise 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% of profits sourced from New Zealand and its heavy reliance on mortgage brokers.

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

But the major damage to ANZ's reputation has come from its association with Tricom and the now-collapsed Opes Prime, lending to brokers who were using the money to finance loans against small and illiquid companies.

Its loan to Tricom was about $500 million and its exposure to Opes was about $650 million.

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

The bank has established an internal inquiry into its behaviour in lending to Opes, and has promised to make the findings of the inquiry 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 the bank's underlying earnings.

KEY POINTS

? ANZ result expected to fall for the first time in more than a decade in wake of bad loans.

? Analyst warns of banking sector profit downgrades of between 25% and 35%

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