ANZ primed for more provisions

ANZ is anticipating the need to take increased provisions against loans linked to derivatives, the bank's chair, Charles Goode, told the annual meeting in Brisbane yesterday.

ANZ was operating in an environment, Goode said, "where worldwide debt reduction will prolong the difficult economic circumstances. There will be further bad debts. There will be more regulation.

"There will continue to be volatility in financial markets. This will effect valuation on derivatives and the charges we take for credit risk on derivatives will continue to be high."

Thus, Goode said, "A loan book in such circumstances will show credit deterioration and therefore may require more capital to support it."

ANZ was forced to take provisions, first announced as long ago as February 2008, for credit exposure to a structured credit transaction, on which the performance of the underlying credits must be deteriorating as the scope of the worldwide recession becomes pronounced.

In this instance ANZ is warning of the prospect of further mark to market write downs on the credit default swap portfolio.

Goode did not explicitly expand the warning on higher provisions linked to derivatives to a more general warning on higher provisions because the economic outlook is so poor, but the theme was clear enough.

"This is an environment," Goode said, "from which we do not expect a quick recovery."

This left only a little bit of bad news to slot into the speech of ANZ's managing director, Mike Smith.

Smith, talking about the use by ANZ and other banks last week of the Australian government guarantee on offshore term debt noted that "the pricing reflects that the appetite for Australian government risk is not deep and investors are presently spoiled for choice."

At a follow-up media briefing Smith said any focus on growth in earnings per share was now irrelevant and the only thing that matters for banks is balance sheet strength, which is why ANZ raised the general provision to 1.1 per cent of risk-weighted assets (double that, by comparison, of Commonwealth Bank), raised capital and raised liquidity.

Taking a wider and longer term theme in his speech Smith declared that "the board did not appoint me to run an average bank or to deliver an average performance."

Taking a rhetorical stand Smith said "the game has changed in global banking and the next two years is about the survival of the fittest.

"Stronger banks will attract more deposits, they will get the pick of new clients as other banks retreat from the market and they will have the ability to reprice to reflect the higher costs of funds and risk. This is ANZ's space."

The converse is true for weak banks, he said.

So in this climate, Smith said, ANZ "is creating potential opportunities to advance our strategic agenda in Australia and Asia in a disciplined and measured way."

According to Smith the relatively high rates of growth in Asia make the super regional strategy unveiled a year ago "so much sense".

"My intention and the board's intention, is that ANZ comes out of this period as one of the strongest, best positioned and most successful banks in the region."