For the second time in two trading days Australian stockmarket investors, and investors in the country’s big banks, have been battered by another example of bank management incompetence and boardroom ineptitude.
On Friday it was the National Australia Bank which stunned the market with a $830 million write-down on credit securities written over US housing mortgages and yesterday it was the turn of its fellow Melbourne rival, the ANZ, to reveal a sharp rise in bad debt provisions for the second half of the year and more worrying, a 20% to 25% drop in cash earnings.
The ANZ’s news reflects badly on former management and board members, some of whom are still there.
The ANZ forecast the biggest full-year profit drop since the last recession in 1992 when it was crippled by bad debts to property and stockmarket players.
This time it’s those, plus previously disclosed loans and investments in the US and an association with a monoline insurer that has gone bad and continues to hurt the bank. An d rising provisions for credit losses because of the slowing economy.
The shares had their sharpest fall in 21 years as they plunged by more than 13% at one stage. They ended down 11% at $15.81, a fall of $1.94 on the day.
The bank said cash earnings per share (which excluded income from derivatives trading) will fall 20% to 25% in the year to September 30, as the company tripled provisions for bad loans to more than $2.1 billion, compared with 2007’s figure.
In the wake of the NAB’s shock announcement last Friday, Australia’s five biggest banks have lost a combined $27.4 billion in market value.
The NAB fell 76c yesterday to $25.80, Westpac dropped $1.76 or 8% to $20.33; the Commonwealth shed $2.15 or 5% to $41.10 and St George fell 8.4% or $2.41 to $26.20.
ANZ shares are now around half the value of their high in October last year of $31.55.
ANZ’s second half provision came on top of first half credit write downs of $980 million, bringing the full year potential loss to close to $2.2 billion.
But in contrast to NAB, ANZ has attributed its likely losses to local clients rather than any exposure to the troubled US property market, although some of the first half losses were due to the involvement with the downgraded monoline insurers.
ANZ revealed it had made a further provision of $160 million related to its exposure to those monoline insurers, in addition to the $226 million booked in the first half.
Chief executive Mike Smith said the second half collective provision charge had been raised to $376 million, or around 1% of credit risk weight assets.
He explained in a statement to the ASX that the decision was a response to both the deteriorating global credit environment and the softening domestic economies in New Zealand and Australia.
ANZ’s individual provisions charge is now expected to be around $850 million in the second half compared to $604 million in the first half.
Those likely losses flow from ANZ’s lending to a number of previously identified corporate failures, including payment firm Bill Express and securities lender Primebroker. Both companies are now in administration.
The ANZ had an involvement with the messy and failed margin lender Opes Prime and another failed broker, and helped financed Tricom, a third troubled margin lending business.
But the individual provisions also cover a number of commercial property clients the bank refused to identify although they are known to include Centro Properties Group and US-based mortgage lender Countrywide which has been taken over by Bank of America.
Earlier this year brokers estimated that ANZ had a $500 million unsecured exposure to Centro, a $700 million secured exposure and a $150 million exposure to Countrywide.
In a phone briefing , Mr Smith made it clear he wasn’t impressed:
"Having to announce these sort of provisions is beyond disappointing," he said.
"What is really irritating is that we having to spend so much time on remedial action, so much time and money on addressing legacy issues when I know there is real growth potential available to the business."
The bank made it clear in its statement that it had enough capital to fund that growth, having completed its 2008 term funding and with $32 billion in liquid assets and that there would be no cut to the full year dividend of $1.36 a share.
ANZ said its 2008 cash profit was likely to be over $3 billion. It said that while its underlying business was performing well, particularly its personal banking and Asia businesses, significantly higher mortgage interest rates and higher food and petrol prices were weighing down heavily on consumers and business.
”While losses are being contained, individual provisions are likely to be around three times the low levels experienced in 2007. Losses on commercial and corporate lending have also increased,” the bank said.
The bank said it had no direct exposure to US subprime mortgages, and no direct exposure to subprime collateralised debt obligations (CDO). Mr Smith made it clear the ANZ had no exposure to the sort of securities which caused NAB’s write-down last week.
ANZ said its commercial property exposure was about $26 billion, or 8% of its total loan book.
Mortgage and credit card arrears in Australia had risen "only modestly" Mr Smith said.
"But we do need to take a conservative view as the economy slows further. I think it’s is entirely unrealistic to assume that the position can maintained."
New Zealand’s economy was now contracting and t
