Why ANZ is faraway a better investment

There were no individual surprises in what the ANZ chief executive, Mike Smith, disclosed yesterday: the bank's expected collective "rainy day" provision was raised by another $375 million, leaving it as the most conservatively provisioned big Australian bank on this general measure, at just over 1 per cent of risk-weighted assets.

There were no individual surprises in what the ANZ chief executive, Mike Smith, disclosed yesterday: the bank's expected collective "rainy day" provision was raised by another $375 million, leaving it as the most conservatively provisioned big Australian bank on this general measure, at just over 1 per cent of risk-weighted assets.

New specific provisions of $850 million, including provisions of $500 million in the big business portfolio, mainly reflect the bank's well-publicised loan exposures to the margin-loan/stock lending broking debacle, Bill Express, and property companies, led by Centro.

ANZ's underlying business appears to be tracking well, with profit before provisions in the year to September expected to be 8 per cent higher on a similar income increase - and like NAB's chief executive, John Stewart, last Friday, Smith says the dividend is expected to be maintained.

The cumulative effect, however, of an expected 20 to 25 per cent decline in earnings per share for ANZ was clearly not expected. The 11 per cent slide in ANZ's share price shows investors are still working out that the subprime crisis will weigh on bank earnings in several ways: by raising bank wholesale funding costs, depressing loan demand, eroding consumer credit debt service quality slightly across the economy, and, of course, by producing loan losses in exposed corporate situations.

The saving grace after the ANZ and NAB writedowns continues to be that, so far, Australian banks are handling the pain. There have been no panicky share placements to buttress capital, and dividends are still flowing as planned.

If they can hang on and investors can, too, their battered shares are fabulous long-term buying at present - with dividend yields above 9 per cent in the case of Westpac and CBA, above 10 per cent in the case of ANZ, and above 11 per cent in the case of NAB. Geoff Dixon declined to detail the highlights of his seven-year-plus tenure as Qantas chief executive yesterday, but the September 11, 2001, crisis, the successful launch of Jetstar and the private equity bid to privatise the airline would be at the top of the list.

The 2001 terrorist attacks resulted in global airline losses of more than $US12 billion ($12.5 billion), but they also drove home the fact that in an inherently risky industry, Qantas had inbuilt redundancy.

International carriers were knocked for six by the slump in traffic, and Qantas was not immune, losing $15.5 million on its international routes in the December 2001 half.

But in Australia, its domestic market share vaulted to about 90 per cent as Ansett collapsed, and although Virgin elbowed its way in, domestic earnings before interest and tax leapt by $170.8 million to $298.2 million in the full year.

Then, in 2003, Dixon launched Jetstar. Other premium airlines, including British Airways, had tried and failed to create a discount arm, and the excursion was considered by many observers to be high-risk. Instead, Jetstar has been a great success, not just in its own right but in the way it has interacted with the full-service airline, picking up low earnings-yield routes, for example, and making them more profitable.

There were slightly serendipitous elements domestically during Dixon's tenure, in Ansett's collapse, and in Virgin Blue's decision to edge away from the budget market. But Qantas was also in much better shape than Ansett going into the 2001 crisis, and Virgin Blue moved upmarket partly because of the margin pressure Jetstar was generating in the discount travel segment.

Last year's failed private equity bid for Qantas will be considered by some to be an asterisk in the biography of Dixon, who would have led the airline for the Allco-TPG consortium, as part of a management group that was to own 1 per cent.

But criticism at the time that Qantas's board, including Dixon, somehow deserted the airline's shareholders by backing the takeover looks pretty lame now.

Investment patriots can argue that it has been Good For Australia that the bid failed. But with Qantas closing 1.7 per cent lower at $3.43 a share yesterday, still not far from its low of $3.01 on June 25, there can be no doubt that the private equity offer itself was a pearler, at $5.45 cash - cash that would have been banked by accepting shareholders if the consortium had got past 50 per cent, instead of missing by a whisker. The money was there courtesy of a $7.5 billion advance from the consortium's banks, on a covenant-free basis.

Qantas now has four flight paths that are separate in a market sense but symbiotic as a business proposition: domestic premium travel, international premium travel, domestic no-frills travel and international no-frills, through the 49 per cent-owned Jetstar Asia.

It is a unique combination in the world, and while the seeds for the domestic position were sown in 1992 when the Keating government sold Australian Airlines to Qantas as a precursor to Qantas's privatisation, the rest is largely attributable to Dixon's aggressive stewardship.

His successor, Jetstar's Alan Joyce, need only continue to manage the airline tightly to be in prime position to be a hunter, and not one of the hunted, in the period of consolidation of airline ownership that the high oil price is forcing.

The unsuccessful internal candidates - Qantas executive general manager John Borghetti and group chief financial officer Peter Gregg - would have done the same thing: position the airline to emerge even stronger from a period of global rationalisation that Dixon, Joyce and their chairman, Leigh "The Shadow" Clifford, said yesterday was not only inevitable, but overdue.


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