As Lean Times Bulk Over The Horizon, Generous Loan Books Leave Banks Exposed

The Age

Tuesday April 8, 2008

Malcolm Maiden

The market has already anticipated another round of provisioning by the banks.

ANZ has a unique and ugly problem with its exposure to the failed leveraged share investment specialist Opes Prime, but its decision to boost general bad debt provisioning sends a wider signal to the market about the vulnerability of boom-time lending books in a downturn.

This may or may not herald the beginning of another round of provisioning by ANZ's competitors, but the across-the-board sell-down of bank shares yesterday indicates that investors are concerned that it is; and it will probably turn out that they are correct.

But National Australia Bank has already quietly pre-empted the ANZ move, with its announcement on March 28 that the bulk of a $221 million gain on the sale of Visa float shares would go into a one-off bad and doubtful debt provision pool in light of the "uncertain global economic environment".

Commonwealth Bank, which sparked heavy selling of the banks in mid-February when it announced higher loan loss provisions in its interim profit, is also believed not to have more to say at present.

ANZ's announcement is another reality check for investors, however. The bank said total provisioning for credit impairment in its first half to the end of March would be about $975 million, up from $567 million for the entire year to September 2007.

ANZ announced higher provisioning in mid-February including a write-down of $200 million against a monoline insurance policy, a collective (that is, non-specific) provision of $90 million on a downgrade of a property borrower, and a specific resources-sector write-down of $51 million.

Yesterday, it raised the mark-to-market monoline provision to $226 million (but maintained that it would eventually be reversed), and boosted general provisioning by $350 million.

More than 90% of the increase is in the bank's institutional, or corporate, loan book, and more than half of that is related to credit downgrades of about a half dozen property industry and broking industry borrowers, including Opes Prime. About 30% or so is a general increase that reflects ANZ's view that corporate bad debts generally are on the rise.

The remainder flowed under accounting rules, with the ANZ provisioning a 20% increase in institutional loan volumes in the March half as borrowers fled the frozen debt markets.

But ANZ chief executive Mike Smith says the migration from the debt markets is now being overshadowed by lower demand from companies overall, as they step back and wait to see what the credit crisis and economic slowdown are going to produce. His core message is that an era of easy profits on lending is over for the banks. The obverse, that the era of easily financed bids is also over, was also demonstrated yesterday, with Lachlan Murdoch deciding not to revive his bid for Crown.

In Australia, the Reserve Bank's official interest rate rises are also bearing down on loan demand, consumer demand and corporate debt service capability - although, as Smith observes, rates have been rising here because the economy has been extraordinarily strong, and business conditions are still not at all bad: ANZ's revenue is rising at an 11% clip.

Within that matrix, ANZ's exposure to Opes Prime is an outlyer, albeit an appalling one regardless of whether the bank succeeds in retrieving the $650 million or so it lent to Opes with its sell-down of shares out of Opes' client portfolios.

Merrill Lynch also lent more than $400 million to Opes, but secured that against higher-quality shares, almost all of them inside the S&P/ASX 200 Index, and it sold them quickly and cleanly. ANZ took security against lower-quality shares - more than half are outside the S&P/ASX 200 - and is struggling to wipe the debt slate clean amid legal actions by dispossessed Opes clients. It's a first-class debacle born out of third-class lending, and after Smith has negotiated as clean an exit from Opes as possible, heads will roll inside the bank.

JUST Group's "don't sell" warning to shareholders yesterday continued the staged ramp-up of what will be a spirited defence against the $900 million shares-and-cash takeover bid Solomon Lew's Premier Investments is mounting.

The full defence will come in Just's formal response to Premier's formal bid in a few weeks' time, but yesterday's statement provides the bones of the plot.

"The nature of your investment will change if the Premier offer succeeds." Translation: Just will unfavourably compare the status quo for Just shareholders with life inside a firmly Lew-controlled Premier Investments.

"Just Group has taken steps to ensure the independence of Just Group's response." Those steps were: quarantining two Lew associates who joined Just's board in February, Michael McLeod and Terry McCartney; and, last week, rejecting a Premier suggestion that Just chairman Ian Pollard could join Premier's board if the bid succeeds. Both moves were predictable, but Just is keen to underline that the bid is unsolicited.

"Just group has a strong track record of exceptional management and financial performance." This lights the fuse on a performance-based defence. Just will fancy its chances, partly because a recommendation can help Premier past 80%, the level at which the share exchange component attracts capital gains tax rollover relief.

"We are committed to ensuring that shareholders benefit fully from Just Group's underlying value and growth potential." That is: Sol Lew must offer more to win a recommendation.

mmaiden@theage.com.au

© 2008 The Age

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