ANZ stock savaged after $1.2b hit

The bank will take a charge of about $1.2 billion for the six months to September 30, taking the total for the 2008 financial year to almost $2.2 billion. This is after it raised its first-half provisions to $980 million.

The bulk of yesterday's shock increase was accounted for by ANZ's troublesome institutional division, which has repeatedly tripped over with its loans to hard-pressed parts of the business sector and marginal financial services players.

The latest provisions - much higher than expected - will translate into a fall of 20 to 25 per cent in cash earnings per share. That, in turn, will slash last year's $3.9 billion cash profit to between $3.11 billion and $3.32 billion, on ANZ's estimates.

Stunned investors responded by slashing the bank's share price by 11 per cent to just $15.81 - its lowest level for five years.

The bank sought to soften the blow by declaring it would maintain the full-year dividend at $1.36 a share, with the second-half payout coming in 74c, the same as last time.

That is against an expected 8 per cent growth in underlying profit and revenue - thanks to a continuing strong performance by the retail banking arm and its expanding Asia-Pacific division. But all of the increase in earnings will effectively be wiped away by the higher provisions.

ANZ's bad news comes just three days after National Australia Bank revealed its exposure to mortgage-backed securities linked to the US subprime housing crisis had cost it $830 million in additional bad debt charges.

That provision will lop about $600 million off NAB's expected 2008 profits, which are likely to fall below $4 billion as a result.

ANZ's difficulties are different as they cover an extra $850 million for soured loans to companies in the deteriorating property market, including ailing stockbrokers like Opes Prime and Primebroker and the collapsed payments company Bill Express.

But it has also set aside another $375 million - the same amount as in the first half - to cover growing customer problems as a result of the credit crisis and the economic downturn in Australia and New Zealand.

A further $160 million provision has been made for potential losses against exposure to monoline insurers in the US, which provide credit protection for a complex series of specialised trading instruments taken out by major companies. ANZ took a $226 million hit for the same problem in its first half.

In all, the bank has put in place charges to cover the possibility of about 1 per cent of its $249 billion worth of risk-associated assets going bad - said to be the highest figure of all the major Australian banks.

Mike Smith, ANZ's chief executive, who took on the job just 10 months ago, said part of the blame for higher provisions related to what he described as "legacy" issues - a reference to loose lending practices - in the bank's institutional division.

This, he said, was "beyond disappointing" and meant it would take longer than expected to turn around the underperforming business.

Mr Smith admitted overall ANZ had not performed well over the past year. But he said there was no change to his five-year target to double the bank's profits by 2012.

"If we have two to three bad years, then so be it, but we are positioning the business to move forward," he said.