The ANZ bank this morning warned the market its looking at a 25% drop in earnings because of dodgy and bad loans.
In a statement to the ASX the bank joined its Melbourne rival, the National Australia Bank, in softening up shareholders for the worst.
The ANZ said 2008 cash earnings per share were likely to fall between 20% and 25% on the previous year due to a rise in credit impairment costs.
ANZ said its provisions in the second half were likely to be around $1.2 billion as a result of the ongoing deterioration in global credit markets. It made provisions of $980 million in the first half.
The ANZ forecast that 2008 annual profit before provisions to rise by around 8% and its annual cash profit would exceed $3 billion for the year to September 30.
The second half collective provision charge is expected to be $375 million, from $376 million in the first half while for individual provisions, ANZ said known credit issues had deteriorated including ”certain commercial property clients, securities lending and Bill Express”.
Second half individual provisions are expected to be around $850 million, from $604 million in the first half.
”ANZ’s underlying business is continuing to deliver a solid performance, and we expect a cash profit of over $3 billion in 2008,” chief executive Mike Smith said in the statement to the ASX.
The news comes after credit rating agency, Standard & Poor’s revised its credit watch outlook for the National Australia Bank and its subsidiaries after the bank’s shock revelation on Friday that it had put aside an extra $830 million to cover provisional losses on dodgy housing loans in the US.
S&P said it was changing the NAB’s outlook to negative from stable.
The decision caused the market to drop 3% on Friday and the NAB almost 14% in the biggest drop in almost 21 years.
Investors on Friday cut $7 billion from NAB’s market value.
The $830 million provision adds to another charge booked earlier this year and takes the bank’s total exposure to $1.01 billion, meaning some 90% of the value of the CDOs has now been written down.
The ratings agency said the additional provision was a significant amount, representing 40% of NAB’s pre-tax earnings for the first half of fiscal 2008.
However, it has affirmed its current credit rating (AA/A-1+).
Standard & Poor’s said the banks ratings were likely to be lowered if NAB were to suffer a further significant increase in credit costs, if some other significant unfavourable information was to emerge, or if NAB experienced adverse investor sentiment.
"Although we expect the bank to remain profitable in the second half of fiscal 2008 and that the large provision is a one-off event, the negative outlook reflects the risk of further increases in credit costs in the next 12 months," Standard & Poor’s credit analyst Sharad Jain said.
"Apart from emphasising the potential for higher credit costs, today’s announcement highlights that NAB may face challenges in predicting future credit losses.
"Furthermore, such developments could reduce investor confidence, which would put pressure on the bank’s funding access and costs."
Standard & Poor’s said it expected NAB would continue to "rigorously monitor and manage its credit exposures, funding, and liquidity amid the challenging conditions in the financial markets, and maintain its conservative capital profile".
The NAB’s CEO, John Stewart said on ABC TV yesterday that "This is the bottom for us for housing in the US because we are now cleared out".
Mr Stewart said NAB’s other business continued to do well and the company’s dividend would therefore be unaffected by the $830 million provision.
The bank late Friday revealed a further $4.5 billion in CDOs written on a mixture of corporate loans, infrastructure and commercial property assets in Australia, Europe and the US.
Mr Stewart said the situation for the US housing market would probably worsen.
"Things are going to get worse," he said.
"There are more than 18 million vacant properties for sale in the United States just now. That’s more than the whole housing stock of Australia."
He said it was a worrying time for the US economy and it would be some time before it recovered.
Mr Stewart said the National would not have to raise new equity to account for the provision.
"No, we don’t," he said.
"That’s why we were so confident that we should take a big write-off here and not let it drip over the next few years," he said.
It’s the biggest crisis for the bank since the foreign exchange options trading losses four years ago and it wouldn’t surprise if the key regulator, APRA, became involved.
Shares in NAB, the nation’s second largest bank, ended down $4.14 or 13.49% on Friday at $26.56.
The ASX200 index finished down 173.6 points, or 3.37%, to 4970.5 after hitting a low of 4939.8 in intra-day trade, while the All Ordinaries shed 157.4 points, or 3.03%, to 5031 after reaching a low of 5003.2 in early trade.
It was the biggest one-day fall since January 22, when the All Ords fell 7.3% and the S&P ASX 200 fell 7.1%. The futures had the local market opening up 24 points today after trading overnight Friday.
The Commonwealth Bank fell $3.14, or 6.77%, to $43.25, the ANZ shed $1.70, or 8.74%, to $17.75 and Westpac fell 71c, or 3.11%, to $22.09. St George Bank lost $1.04, or 3.51%, to $28.61.
Analysts said the NAB would suffer a $600 million blow to its annual net profit for the year to September 30 after the write-down.
The NAB also faces pressure on earnings from sluggish economies and lending in New Zealand and in Britain.
