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New Zealand's biggest bank, ANZ National, says bad loan charges are likely to treble this year because of a rapid slowdown in the economy, bringing an end to years of rapid growth in profits.
"The New Zealand economy is contracting," the bank's Australian parent ANZ Banking Group said yesterday in a trading update.
"Significantly higher mortgage interest rates and higher food and petrol prices are weighing heavily on consumers and business.
"While losses are being contained, individual provisions are likely to be around three times the low levels experienced in 2007."
Individual provisions are the funds banks set aside to cover loans that have gone bad.
The situation was even more dramatic in Australia, where ANZ flagged A$1.2 billion in second-half provisions related to deteriorating economic conditions and credit markets. .
"It appears a system-wide slowdown in Australia and New Zealand is under way, with bad debts growth also reflecting this," said Craig Williams, a Sydney-based analyst at Citigroup.
Yesterday's news triggered a 10.9 per cent fall in ANZ's share price and prompted Australian Treasurer Wayne Swan to reassure markets and the public that Australia had a "strong, well-regulated banking sector which is capable of withstanding the fallout from these international developments".
In New Zealand, ANZ National's profit was expected to fall by around 10 per cent because of the extra provisioning which comes straight off its bottom line.
Excluding its local institutional division, ANZ National's individual provisioning for the 2007 full year was $55 million, on yesterday's information, that is likely to climb to about $165 million this year.
Similarly its profit excluding institutional was $822 million last year. A 10 per cent fall this year, as estimated, would suggest a figure of around $740 million.
But ANZ National chief executive Graeme Hodges said his bank's institutional division was having a "fantastic" year and would offset the shrinking net profit, maintaining overall profit at a similar level to last year's $1.039 billion.
"ANZ National Bank will continue to make more than $1 billion," he said.
Hodges said provisions and arrears had been increasing since last September.
But when the bank posted its September 2007 year results in October it revealed a big jump in provisioning over the previous 12 months, to levels Hodges at the time described as "normal".
Yesterday he was once more downplaying the latest increases. Although individual provisions would be three times greater than last year, they would still be "slightly below" what the bank believed was the average across the business cycle. That said, he believed they could go higher still.
"It's possible we'll see provisions rise into 2009."
The loan losses requiring provisioning were occurring across most of ANZ National's lending, including consumer, mortgages, unsecured personal loans, the small and mid-sized business market.
"We haven't seen much in the larger business market and nothing much in rural."
Massey University head of banking studies David Tripe said ANZ National's disclosure was no justification for any panic about bank safety.
In fact, he believed ANZ National was being "relatively proactive in making sure they get the bad news out".
Similarly, Australian Treasurer Swan said it was "a very sensible thing for the ANZ this morning to make provision for these potential losses" which had resulted from "poor investment decisions taken over a period of years, as well as the fallout from the global financial market events".
Sensible or not, ANZ Group was punished on the ASX yesterday, with its shares closing down A$1.94 at A$15.81. On the NZX, shares fell $2.51 to $20.50.
Last week Citigroup, which rates ANZ a "sell", issued a report highlighting the prospects of softer earnings from Australian banks, particularly ANZ and BNZ bank owner National Australia Bank. In that report, Citigroup forecast ANZ would post September year cash earnings per share 7 per cent lower than 2007. Yesterday, ANZ said cash earnings per share would probably be down 20 to 25 per cent.
The company said yesterday it expected a full-year cash profit of more than A$3 billion, compared with A$3.92 billion in the previous year.
ANZ's update comes only a few days after NAB said it was setting aside A$830 million for collateralised debt obligations, triggering its biggest share decline since 1987.
- Additional reporting: agencies
