Australia and New Zealand Banking Group, Australia's third-biggest lender, reported a 14 percent fall in first-half core profit due to higher bad debt charges and said it expected higher levels of new problem loans.
ANZ, the first major Australian bank to release earnings in the current reporting period, cautioned that the global environment remained challenging but said revenue momentum had improved each month of the first-half. ANZ's achieved record revenue growth of 12 percent in the first half.
"Ignoring the bad and doubtful debt provisions, the underlying business is tracking quite nicely given the turbulent times," said Peter Vann, head of investment research at Constellation Capital Management.
ANZ posted an October-March cash profit of A$1.674 billion (US$1.58 billion), against A$1.936 billion a year earlier, just shy of analyst expectations. Cash profit, effectively core profit stripping out one-offs and non-cash accounting items, forms the basis for dividends.
The result included a more than four-fold jump in bad debt charges to A$980 million due to ANZ's exposure a U.S. bond insurer and highly-geared Australian companies, pushing the bank to its first half-year profit decline in about a decade.
It kicks off what is expected to be a rough reporting period for Australian banks as lenders battle tough global credit markets, a slowing domestic economy and risk of rising defaults among Australian corporates.
"Other banks will have to have lots of similar issues and they have to come out with some downgrades," Vann said.
"The global environment is challenging, and in areas like retail sales, we are seeing early signs of a downturn in our domestic markets," Chief Executive Mike Smith said in a statement. "However, with steps we have taken to strengthen our balance sheet, we are particularly well placed to weather global volatility," he said.
ANZ said it would underwrite its first-half dividend to shore up its capital, raising about A$700 million. ANZ, which has been fast expanding into Asia, is one of the two banks left in the fray to acquire Hong Kong's Wing Lung Bank.
Some analysts have previously raised concerns that cash-strapped ANZ could struggle to fund its future Asian acquisitions.
"If they come out with a good deal and put it to market, I don't think they will have problem raising capital," Vann said.
Australian banks have enjoyed strong credit growth on the back of 16 straight years of expansion, but analysts expect overall loan growth to slow with interest rates rising to a 12-year high of 7.25 percent.
Banks face rising bad debts as many highly-geared local companies such as Centro Property Group and Allco Finance Group struggle to refinance their short-term loans due to rising credit costs.
ANZ said its gross non-performing loans jumped 63 percent to A$1.048 billion. ANZ shares have fallen 23 percent in 2008, compared with a 21 percent fall in the seven-stock banking sub-index.
Rivals National Australia Bank and Westpac Banking Corp are also expected to announce higher bad debt charges.