Anz Tucks It Away For Rainy Day

ANZ chief executive Mike Smith has defended his bank's 14% dip in profit, saying Australian banks' additional credit costs "barely register" when compared with their international peers.

ANZ, Australia's fourth-largest bank by market capitalisation, made a profit after tax of $1.67 billion in the six months to March.

The decline was due to beefed-up provisions for bad debts, including potential losses on Centro Properties Group and the recently collapsed Opes Prime group. The bank has set aside almost $1 billion for bad debts, about $740 million more than the previous corresponding period.

ANZ shares increased 4.2% yesterday, adding 89? to $22.03, even though the result was in line with market expectations.

Analysts said the "relief rally" was prompted by the realisation ANZ's additional provision for bad debts had provided a solid buffer against further market moves.

Even before the results were released, Citi analyst Craig Williams said management was "tucking a little extra away".

"While the problem loans have ruined the financial year 2008 result in adding an additional $100 million charge for 'ripple effects', the bank appears to be giving itself a head start in financial year 2009," he said.

Mr Smith acknowledged the bottom-line result was not what he would like. But he said Australian banks were "fundamentally well placed".

"Compared to what is happening in other banks around the world, the additional credit costs for ANZ this half, including the provision we took on a US monoline (bond insurer), barely register," he said.

Compared with the corresponding period, ANZ's revenue rose 12% to more than $6 billion, although earnings per share were down 10% to 102.4?.

The fully franked interim dividend, which JPMorgan has agreed to underwrite, will be 62? a share, to be paid on July 1 for shareholders who were registered on May 14.

ANZ chief financial officer Peter Marriott said the tightening in credit markets, and the increased cost of wholesale funding, had also affected the result. These problems have prompted each of the banks to increase their standard variable interest rates independent of a move by the Reserve Bank.

Mr Marriott said it was difficult to calculate how these costs flowed through to overall income. But he estimated the effect was between $40 million and $70 million.

ANZ will continue to pass on additional funding costs to customers. "You will see price very much reflect our cost of funding," Mr Marriott said.

Yesterday, as the consumer price index showed inflation was still running hot at more than 4% a year, Mr Smith said it was reasonable to expect business conditions would soften in coming months even if, as expected, interest rates remained unchanged.

"Retail sales have come off in the last two months, interest rates are much higher and with oil now over $US115 a barrel, I think that some stress is going to emerge in the market," he said.

"So, I think the moves that we have made this half to bolster our collective provision makes a lot of sense, and it allows us to play from a position of strength.

"We are achieving strong revenue growth and we've strengthened our balance sheet - in a nutshell, we are well-positioned."

Mr Smith said ANZ's total provision, including the additional $980 million put aside this period, was more than $2.4 billion - the highest of any bank in Australia.

The chief executive, who took up the position less than a year ago, said ANZ was still clear about its Asian growth strategy.

And although he would make little comment about speculation the bank is in talks with Hong Kong's Wing Lung Bank, he said deals would be made on an opportunistic basis. "These things only come on to the market now and again," he said.

ANZ is the first of several banks to report over the next few weeks. Platypus Asset Management portfolio manager Simon Bonouvrie said the banking sector was an attractive investment, when balanced with diversified miners in a portfolio, because of the way it had been "punished" on the market.

The banks' provisions for bad debts had been priced into the share price, he said, adding: "We are looking forward to reporting season for banks."

MALCOLM MAIDEN

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