A bit of housekeeping and pre-emptive pain taking from the ANZ Bank yesterday once again plunged the banking sector into the red, and sent investors heading for the relative safety of resources.
The ANZ made a surprise announcement to the market that it had boosted its bad debt provisions for the six months to March 31 to nearly a billion dollars, as it continues to battle the fallout from the credit crunch and the failure of Opes Prime and the problems at another margin lender, Tricom.
The news sent ANZ shares as low at $22.01, where it closed, down $1.55 or around 6.5%. The other big four banks had similar experiences. The Commonwealth Bank shed $1.42 to $44.06, NAB fell $1.46 to $29.64 and Westpac dropped $1.00 to $24.13.
The market will now expect the CBA, the NAB, Westpac and St George to provide details of their provisions ahead of reporting earnings.
In contrast to what happened in early February when the ANZ revealed in an update that it had encountered a number of problem loans, the overall market was steady to a touch firmer. The All Ords finished up around 20 points.
Back in early February the disclosure of problems with a monoline insurer in the US called ACA Capital.
The bank yesterday put the total cost of covering that problem and other bad and doubtful loans at $975 million for the first half of 2008 alone, but also said it had included in that an amount in anticipating of more problems in the second half. The bank put away $576 million in all of 2007, so by the time it rules off the year on September 30, the amount could be heading towards three times that figure.
The bank has now forecast total provisions for the 2008 first half to be almost 72% higher than its entire provisions for fiscal 2007 and the figure of $975 million is more than four times the total provision charge it booked in the 2007 first half.
Most of the increase is due to ANZ’s decision to earmark $350 million in collective provisions as its institutional portfolio, including struggling property trust Centro and collapsed securities lender Opes Prime, becomes riskier. As well there’s a $50 million provision for Layfayette Mining.
In February, ANZ set aside $90 million in its collective provisions after a ratings downgrade for a commercial property client, believed to be Centro Properties.
Since then, ANZ has become embroiled in the Tricom implosion and the collapse of Opes Prime and has been selling off a portfolio of shares that secured the $650 million it lent the failed stockbroker.
Despite the announcement, ANZ boss Mike Smith told an investor briefing that he did not expect to absorb hefty losses from the bank’s exposure to Opes.
"Although we don’t expect any material losses from this, or other broker exposures, I am mindful of the effect on our reputation and on the many Opes clients who are being impacted by the fallout from the actions of Opes Prime," Mr Smith said in the telephone conference.
Mr Smith said ANZ was now undertaking a full review of the risks involved in its securities lending business.
"That should be ready fairly soon," he said.
"In the meantime we have to protect our commercial position and our shareholders’ interests."
Chief financial officer Peter Marriott told the briefing that the bank believed it had now allowed for all the current events it is facing.
"We would like to believe therefore that the individual provisions that arise in the second half will in part be covered by the collective provisions taken up in the first half.
"Therefore you would expect to see a reduction in overall levels of provisions into the second half but I’m just cautioning that you can’t allow for what you don’t currently know about."
Notwithstanding the provisions update, Mr Smith said ANZ’s underlying business was now in very good shape.
"Revenue is strong, probably just above expectations, at around 11%."
The February update’s news of an individual provision of US$200 million on its mark to market exposure to US monoline insurer, ACA Capital, has risen to $US226 million at March 31 when it was marked to market.
The ANZ again said it expected that provision to significantly reverse in future periods with the amount falling as profits are written back in.
Mr Marriott and CEO, Mike Smith were both guardedly confident that second half provisions would not be as much and that they could in fact be lower.
They told a briefing this morning that the bank was ‘being pre-emptive’ by including extra provision in the amount for possible future problems in ‘future periods’.
The write-downs and provisions apply to problem loans in its institutional area. Mr Smith said loan areas and losses in personal banking were still low and were in fact lower in Australia.
The bank also released a long statement on Opes Prime and its relationship with various companies which had been affected by the firm’s failure and the ANZ’s action to size shares and sell them. It provided a lengthy list of the companies involved .This was released to the market while the briefing was going on which diverted attention.
And Opes Prime creditors are due to meet in Melbourne later today to get the first real understanding of what happened and their potential losses (and returns, if any).
