Monday August 31, 01:50 PM

ANZ says bad debt bottoming, profit in line

By Morag MacKinnon

SYDNEY (Reuters) - ANZ, Australia's fourth-largest lender, forecast it was starting to see bad debt provisions bottom out and expressed cautious optimism on the outlook for economies of Asia and Australia, sending its shares more than 4 percent higher.

ANZ said total provision charges were tracking slightly better than expectations as it reiterated an outlook it gave in May for higher second-half charges.

ANZ's comments were more upbeat than those earlier this month from competitor Westpac Banking Corp, which saw the bad debt cycle yet to peak and Commonwealth Bank of Australia Ltd, which pointed to risks for the Australian economy.

"I think we've hit the peak of the cycle," Chief Executive Mike Smith of the Australia and New Zealand Banking Group Ltd (ANZ) told analysts in a trading update, referring to provisions.

ANZ, which said it saw cash profit this year in line with 2008, said this half and the next would be similar in terms of bad loan provisions, and the bank's second half ending Sept 30 would be one of its worst.

Smith's comments come 13 months after ANZ shocked investors by saying it would take a A$1.2 billion ($1 billion) hit for bad debts as the global credit crisis impacted its earnings.

Investors punished the bank's shares then as they recorded their biggest one-day percentage fall since the stockmarket crash of October 1987. In contrast, its share rose by as much as 5.5 percent on Monday.

"What the trading update did today was confirm that the full year impairment costs in 2010 will be lower than 2009," said Tom Quarmby, an analyst at Macquarie Equities.

"The banks hadn't given enough visibility around whether that could be the case."

Smith's forecast that ANZ had seen the bottom for bad debt provisions drove ANZ shares 4.1 percent higher to close at A$21.29. Westpac shares were up 0.3 percent at A$24.37 and Commonwealth stock was up 1.9 percent at A$46.00, in a broader market that closed lower.

At the end of last week, ANZ's shares had risen 34 percent, lagging a 41 percent gain in the banking sector subindex.

In the trading update for the 10 months ended July 31, Smith there were no real surprises and the business was performing much as expected.

The bank, while expressing cautious optimism for the Australian and Asian economies, said difficult economic conditions remain in New Zealand, the only economy where provision growth for the group is not moderating.

ANZ said it has raised A$23 billion in funding for the financial year. Borrowing costs continue to rise as wholesale debt is replaced by new issuance, it said.

"It's clearly quite positive," said Mark Nathan, who holds ANZ shares in the portfolio he manages at Fortis Investment Partners.

"The capital position is very, very strong (and) the profit number looks like it's going to be slightly ahead of where the market was expecting," Nathan added.

Last October, ANZ reported a 32 percent decline in cash profit to A$3.03 billion, the bank's first full year profit decline in 10 years.

It then said in May this year that credit provision charges in the second half would be about 20 percent higher than the first half, where they totalled A$1.435 billion.

Although Australia's economy is one of the few globally to avoid recession, its lenders are operating in an environment of slowing credit growth and rising unemployment. But they have been spared the hit taken by their offshore peers, leaving them cashed up and on the prowl for cheap assets.

Citigroup analyst Craig Williams lifted his forecast for cash earnings per ANZ share by 18 percent for the full year, following the release of the update.

Earlier this month, ANZ agreed to buy the Royal Bank of Scotland Group Plc's retail, wealth and commercial operations in Taiwan, Singapore, Indonesia and Hong Kong, as well as the British lender's institutional businesses in Taiwan, the Philippines and Vietnam.

It has a goal of becoming a super regional bank in the Asia Pacific, generating a fifth of revenue from Asia by 2012.

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