Babcock Takes Property Hit

The Age

Tuesday August 12, 2008

Mathew Murphy

THE global financial downturn looks to be plaguing Australia's big banks, with Babcock & Brown downgrading its interim 2008 net profit by as much as 40%.

Australia's second-largest investment bank sounded the warning bell in one of the main weeks of the profit reporting season, saying the deterioration of global finance markets meant Babcock's full-year earnings for calendar 2008 would not exceed the $643 million reported in 2007. Babcock had previously forecast 2008 profit of about $750 million.

The downgrade exceeded most analysts' expectations, causing Babcock's shares to tumble 80, or almost 12%, to finish at a seven-week low of $6.

"With consensus for the full year at $670 million, the market had anticipated a downgrade (to Babcock), albeit we are no closer to gaining comfort with CY09e (calendar year 2009 earnings) forecasts," Citi said in a research note.

Chief executive Phil Green said the uncertainty was not unique to Babcock, as a decline in the global economy had gripped the market and was making it hard to determine profitability.

"The volatile global capital market conditions have made and continue to make business conditions uncertain, and forecasting in the short term difficult," he said. "We will look to provide more detail on the 2008 outlook with our interim result to be reported on 21 August."

Mr Green said he expected group net profit after tax to be 25-40% below the $250 million interim result reported in 2007.

He said the drop in the interim result was due to non-cash impairment provisions for its real estate division and Everest Babcock & Brown. Before factoring in these provisions, the 2008 interim result was expected to exceed that of the previous corresponding period.

The market will now look to Commonwealth Bank's earnings outlook, to be announced tomorrow, to gauge how the financial services sector is likely to hold up.

Greg Canavan, head of research at Fat Prophets, said the profitability of the banks would continue to come under pressure as those looking to pay down their debts caused the balance sheets of the banks to shrink.

"The big question for the banks longer term is to what extent the slowing economy will have an impact on their bad-debt provisions," he said. "The worst is over for the time being but that's not to say that three or four months down the track, if the global economy continues to slow and potentially more companies struggle, that the banks won't feel it, because we are in a deleveraging cycle."

Bendigo and Adelaide Bank tried to shrug off negative sentiment about future profit as it announced a better than expected net profit of $170.5 million for 2007-08, up from $121.8 million in the previous year.

Managing director Rob Hunt said it was not wise to provide guidance for the current year given the global credit crisis and "the unknown of when confidence will re-emerge in some sections of the financial market".

"However, the board and management are confident we will see further solid improvement in profit and shareholder return in 2009 even if the current market conditions prevail," he said.

© 2008 The Age

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