ANZ vs BHP: Chalk and cheese

I was sitting at my desk this morning around 8.30am when two emails landed in my inbox. The first was ANZ's first-half profit for 2007-08; the second was BHP Billiton's production report for the third quarter of 2007-08.
I thought I'd start by getting the bad news out of the way so I opened the ANZ presentation first. This is the first page of the ANZ presentation.

There it was, for all to see. Line one of the result overview "cash profit before provisions". ANZ have even come up with an acronym of "PBP" to use in the presentation as they consistently refer to "profit before provisions" throughout the 68-page results presentation.

Am I meant to think an "11%" rise in cash "PBP" is good news? Is that what I am being told? Then I get the reality check that cash earnings per share is down 16%, the dividend is flat, and the "DRP underwrite ensures we operated from a position of strength". Ahh, guys the DRP underwrite means you are further diluting earnings per share. You are now issuing shares $10 below the levels you were buying them back. Is that good news for me as a shareholder? Is that good capital management?

As the presentation goes on, ANZ keeps telling me about its strong "revenue growth", yet how profitability was impacted by "a significant increase in credit charges". Ahh guys, that means it was unprofitable growth due to poor risk management or inappropriate lending practices.

ANZ is trying to tell me it had strong revenue growth but increased credit charges (provisioning). "We are growing really well by LENDING TO THE WRONG PEOPLE!"

I have written this before but I believe Australian banks are making a mistake by persisting with this "profit before provisions" rubbish. It is ridiculous for a bank to report profitability before provisioning because credit charges are a core part of their business. Do you see resource stocks report "profit before hedging"?

As a very wise old fund manager told me one day in response to my question of, why do banks command a discount to the market? "Charlie, it's simple,” he said. “They lend money and sometimes people don't pay them back."

The issue seems to be that Australian banks haven't had the problem of people not paying them back for more than a decade now and they don't seem to know how to convey to the market that times are tougher. I think ANZ is a cheap stock, and I like new chief executive Mike Smith, but most charts in the bank’s presentation pack reflect a "glass half-full" interpretation of the facts, in my opinion. Here are two examples below.

Margins have been impacted by "accounting noise" And, wait for it. New Zealand 90 day arrears are rocketing up, but the good news is that most are secured!

Nothing to see here; all good

My view remains that Australian banks need to lose the "denial" about the seriousness of the credit crisis they are facing. They need to stop telling us "everything is good here, nothing to see here people". "Profit growth before provisions is double digit". It's like they think all think we believe everything they say.

After the ANZ presentation just made me shake my head, I opened the BHP Billiton email.

The words "record" and "growth" are all over BHP’s third-quarter production report. However, the report also provides a balanced view of commodities where production was disappointing due to weather, industrial action or power supply interruptions.

BHP is Australia's strongest company and, in my view, it is setting a new benchmark in disclosure and transparency with investors. BHP tells it as it is and is also quick to inform the market of negative news when it occurs. It gives vast detail about all its productive assets, be it good or bad news.

If BHP was an Australian bank it would have lines like "production before rain" to describe the Queensland coal disappointment.

It was good to see BHP got record production in iron ore and petroleum. BHP's iron ore production was well ahead of Rio's growth over the previous corresponding period and that is interesting considering they are neighbours in the Pilbara and had the same operating environment. What is that telling you?

A tale of two markets

I look at the ANZ results and I then look at the BHP production report and I see two completely different situations. It is chalk and cheese, particularly if you then do some margin analysis of BHP versus ANZ. It's even more chalk and cheese if you then do some earnings growth forecasting for 2008-09 for ANZ vs BHP.

My view remains that Australian banks are not out of the woods yet. Feedback from the "real world" suggests the domestic economy continues to slow aggressively, particularly in anything household or consumer-related. Net earnings downgrades will continue for the major Australian banks and I remain of the view the relative bottom in Australian banks will not be until they raise fresh equity capital later in the year.

On the other hand I continue to believe the risks to 2008-09 consensus resource sector numbers and capital management are to the upside. There is no equity issuance going on in resources; it is all takeovers and buybacks. Just make sure BHP is in your portfolio before the Chinese turn up on the register.