Volatility And Broker's Collapse Give Anz $1bn Bad-debt Headache
The Age
Tuesday April 8, 2008
ANZ is facing about $1 billion in bad debts because of sharemarket volatility, the collapse of broker Opes Prime Group and the likelihood of further market turmoil.
Its shares fell 6.6% in a flat market after the bank increased its provision for bad debts by $350 million, taking the total to about $975 million for the six months from October to March.About six or seven accounts have forced the move, including Centro Properties Group, Opes Prime and Tricom Equities.ANZ also revealed it had obtained a stake of 5% or more in 90 companies when receivers were appointed to Opes Prime. They include stakes of 20% or more of the ordinary shares of Admiralty Resources, Austin Group, Boss Energy, BioProspect, eBet, Newera Uranium, Powerlan, Solagran, Syrah Resources and Water Wheel Holdings.ANZ is about halfway through a share liquidation program, as it attempts to recover about $650 million owed by Opes Prime.But the bank must make provision for bad debts, even if it expects to recover the money owed, because several accounts have received internal ratings downgrades."As they get downgraded, the risk of losing money increases . . . and because the risk increases, we've got to put more money aside," ANZ head of corporate communications Paul Edwards said.But ANZ group managing director, institutional, Peter Hodgson, will soon complete a review into the risks involved in the securities lending business. Both Opes Prime and Tricom offered securities lending.ANZ chief financial officer Peter Marriott said about half the increased provision for bad debts was related to existing ratings downgrades.The other half would provide for bad debts in the growing commercial lending portfolio, and provide for any ratings downgrades that might come. "Rather than just simply waiting for those losses to emerge . . . we've tried to get ahead of the game," Mr Marriott said.According to ABN Amro analyst Jarrod Martin and colleagues, more Australian companies are likely to experience financial distress.They expect banks will have to increase their provisions for bad debts by more than $1 billion over the next year."We estimate the current data from Dun & Bradstreet implies the potential for $3.5 billion of distressed debt and an increase in provisions of $1.1 billion over the next 12 months," Mr Martin wrote.ANZ chief executive Mike Smith said the increase in bad debt provisions was "pre-emptive", taking into account market conditions, which have sent the Australian market more than 11% lower this calendar year. "I have heard some people calling the bottom after the Lehman (Brothers) and UBS recapitalisation, but I think it's too early," he said."And I think it's going to take . . . two quarters of clear results without adverse news from the major US banks before we can say we're through this."The turmoil in global markets is still playing out - the US economy is slowing and if it's not in recession, then it certainly is in something that looks like it."Mr Smith acknowledged the heartache caused by the collapse of Opes Prime and the liquidation of large lines of stock, formerly held by the broker's clients.Some clients have obtained injunctions preventing the sale of parcels of shares, at least for a short time. But many clients stand to lose their stock, and possibly strategic stakes in individual companies."It's tough for everybody and I know that," Mr Smith said. "When irregularities of this nature occur within a company there are no winners."But Mr Smith defended ANZ's right to recover Opes Prime's borrowings, even though the actions were likely to affect the bank's reputation."We have to protect our commercial position and our shareholders interests," he said. "I think we all need to remember that ANZ would still be supporting this business if irregularities had not been discovered inside the company."Yesterday, banking shares fell sharply while the broader market gained 0.1%. ANZ shares fell $1.55 to $22.01, Westpac lost 4%, closing at $24.13, Commonwealth Bank declined 3.1% to $44.06 and National Australia Bank was down 4.7% to $29.64. St George fell 5.4%, to $26.22.LINK? www.anz.com.au
© 2008 The Age