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Australia and New Zealand Banking Group Ltd (ANZ), Australia's third-biggest lender, warned that it may face a US$200 ($256.6 million) hit on its exposure to a US bond insurer, dragging down its shares more than 6 per cent.
The charge comes less than a week after Commonwealth Bank of Australia Ltd, the country's second-biggest bank by assets, rattled investors by missing profit estimates due higher provisions and funding costs.
Fund managers said the higher provisions flagged by the two banks could spread to the sector.
"The banks are saying that their core underlying business is good. But their earnings are getting bitten up and chewed by the provision increase," said Paul Biddle, a portfolio manager with Souls Funds Management.
ANZ also said in a trading update on Monday that its growth in profit before provisions in 2008 was on track to exceed the 11.5 per cent growth achieved in 2007, although it expected that to be offset by higher provisions due to tough global credit conditions.
ANZ's shares slipped as much as 6.3 per cent to a near two-and-a-half year low of A$22.41, ($25.98) sparking a sell-off in other banking stocks.
ANZ was trading down 5 per cent at A$22.68 at 0030 GMT. CBA shares fell 4.2 per cent to A$44.45 and industry leader National Australia Bank Ltd lost 2.2 per cent to A$29.97.
ANZ reiterated it had no direct US subprime exposure, but said the US$200 million provision was on a derivative position with a US monoline insurer which had been downgraded to non-investment grade.
Monoliners, or bond insurers, have been hit hard by the US subprime crisis after insuring US$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.
ANZ's Chief Executive Officer Mike 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," Smith added.
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.
ANZ shares have fallen 13 per cent in 2008, compared with a 18 per cent fall in banking sub-index .
Separately, regional lender Bendigo Bank Ltd reported a 27.6 per cent rise in its first-cash profit, broadly in line with market expectations.
- REUTERS
