ANZ Bank’s Profit Slumps as Bad-Debt Provisions Almost Double

April 29 (Bloomberg) -- Australia & New Zealand Banking Group Ltd., the nation’s fourth-largest lender, said profit fell 28 percent in the first half as bad debts almost doubled.

The stock slumped 4.7 percent, the most in more than two months, after the Melbourne-based bank reported that net income dropped to A$1.42 billion ($1 billion) in the six months ended March 31, from A$1.96 billion a year earlier. The bank’s credit impairment charge almost doubled to A$1.44 billion.

Chief Executive Officer Mike Smith, who joined ANZ after running HSBC Holdings Plc’s Asian operations, faces an Australian economy headed for its first recession in 18 years. Cameron Clyne, CEO of larger rival National Australia Bank Ltd., reported lower earnings yesterday and said bad debts would spread from businesses to consumers.

“Arrears across a lot of their markets are picking up, so you’re seeing the impact of Australia sliding into recession,” said Sean Fenton, who manages about $324 million at Tribeca Investment Partners in Sydney. “We’re seeing the other side of the coin with bad debts accelerating, so I think that’s enough to put a halt to the bank rally.”

ANZ shares, which have rallied 33 percent since a February low, declined 78 cents to A$15.85 at 11:09 a.m. in Sydney. National Australia Bank fell 3.6 percent to A$20.51.

ANZ cut its dividend for the first time since the 1991 recession as its credit impairment charge almost doubled to A$1.44 billion. It will pay 46 cents per share for the half year.

Rising Provisions

Credit provisions rose to A$247 million and are expected to double in the full year. Provisions for credit impairments increased 72 percent to A$626 million. Individual provisions occurred primarily in Australia, including one for its securities firm and others for property, financial, and service industry businesses.

“An uptick in provision levels in March, driven largely by stress being experienced by middle-market customers,” means the bank expects full-year provision levels will be “somewhat higher” than anticipated at a trading update in February, ANZ said in today’s statement.

Gross impaired loans total A$3.69 billion, or 1.03 percent of net advances, the bank said.

“Provisioning is probably higher than first thought, but offsetting that income is also higher,” said Paul Xiradis, who manages the equivalent of $8 billion as chief executive officer of Ausbil Dexia Ltd. in Sydney including ANZ shares.

National Australia Bank said yesterday that first-half profit fell 0.9 percent to A$2.66 billion as bad debts rose. Cash earnings, which exclude gains from currency and interest rate movements on the bank’s debt, fell 9.4 percent.

Government-Backed Debt

Problems in ANZ’s markets at home have diverted Smith’s attention from Asia, where he plans to increase the bank’s business. The bank confirmed interest in Royal Bank of Scotland Plc’s Asian assets this month and plans to open 20 branches in China by 2012.

Smith has sold government-backed debt to protect the bank’s balance sheet and maintain profitability as the economy slows.

Australia may have followed the U.S., U.K., Japan and Europe into its first recession since 1991 after gross domestic product fell 0.5 percent in the fourth quarter.

“The expected slowdown in Australia and New Zealand is now playing out with the outlook for provisions in the second half likely to be somewhat more difficult than the first half and we expect that situation to continue through to early 2010,” said Smith in today’s statement.

ANZ has completed raising 87 percent of funds it plans to source in bond markets for the year through Sept. 30, it said.

Capital Ratios

Australia’s biggest lenders have sold more than $85 billion of state-backed notes since Nov. 28, when the AAA-rated government first guaranteed their funding in a bid to thaw credit markets frozen after Lehman Brothers Holdings Inc.’s bankruptcy, according to the central bank.

“The Australian banking system is considerably better placed to weather the current challenges than many other systems around the world,” the Reserve Bank of Australia said in its half-yearly Financial Stability Review published March 26.

ANZ Bank’s Tier 1 ratio, a key measure of financial health, was 8.2 percent. The cost-to-income ratio at its Australian business, a measure of profitability, dropped 162 basis points to 36.1 percent. Net interest margin, the difference between what the bank earns from loans and pays to depositors, increased 22 basis points to 2.22 percent.