ANZ Sees $200 Million Hit in US, Shares Drop

Australia and New Zealand Banking Group, Australia's third-biggest lender, warned on Monday it may face a $200 million hit on its exposure to a U.S. bond insurer, knocking its shares down more than 6 percent.

The charge comes days after second-ranked Commonwealth Bank of Australia rattled investors by missing profit estimates due to higher provisions and funding costs.

Australian banks have enjoyed strong demand for loans on the back of 16 straight years of economic growth while a jobless rate at three-decade lows has kept a lid on loan losses.

But higher funding costs, sparked by the global credit crisis, are pushing up bad debt charges due to banks' exposure to highly geared companies such as Centro Properties Group and Allco Finance Group.

There are concerns the trouble could spread to other banks.

"What this tells you is, if there are cockroaches in the kitchen, there could be more under the refrigerator," Paul Biddle, a fund manager with Souls Funds Management. "The banks are saying their core underlying business is good. But their earnings are getting bitten up and chewed by the provision increase," Biddle added.

ANZ said in a trading update that its growth in profit before provisions in 2008 was on track to exceed last year's 11.5 percent, although it expected that to be offset by higher provisions due to tough global credit conditions.

ANZ also took A$141 million in additional charges from a commercial property and a resource client.

ANZ Chief Financial Officer Peter Marriott said first-half fiscal 2008 profit could be lower than the second-half fiscal 2007 profit due to the higher provisions. But CEO Mike Smith ruled out a cut in dividend.

"Our capital policy is structured to handle situations like this without having to cut dividends," Smith said.

Despite higher charges, most major Australian banks are forecast to report higher fiscal 2008 profit, in stark contrast to billions of dollars of writedowns and losses revealed by major global banks.

No Subprime Exposure

ANZ reiterated it had no direct U.S. subprime exposure, but said the $200 million provision was on a derivative position with a U.S. monoline insurer which had been downgraded to non-investment grade.

Monoliners, or bond insurers, have been hit hard by the U.S. subprime crisis after insuring $2.4 trillion of debt securities worldwide, including repackaged subprime mortgages, and are facing downgrades from credit rating agencies.

"It was disappointing. It seems ANZ doesn't know completely how everything's going to play out. The news itself is not good and the uncertainty is not good either," said Rob Patterson, managing director of Argo Investments.

Smith assured analysts there was no more bad news to come on its insurance exposure.

"The current portfolio doesn't have those monoline exposures. The rest of the portfolio ... are special purpose vehicles which are not in fact monoline," he said.

Smith said ANZ's underlying business was in good shape, driven by strong revenue growth.

ANZ said the turmoil in global financial markets has impacted a small number of customers, but added that consumer credit quality in Australia remained solid with low arrears and actual losses modestly below initial expectations.

"The health of the consumer market is reflected in credit card arrears being 5 basis points below levels 12 months ago," it said. Separately, regional lender Bendigo Bank reported a 27.6 percent rise in first-half profit, broadly in line with market expectations.