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Australia calls for calm as banks suffer bad debt

The Australian government said yesterday that the country’s banks were sound after news that major lender ANZ had increased provisions for bad debt led to a plunge in bank stocks.

Treasurer Wayne Swan called a press conference after shares in ANZ, the country’s third-largest lender, fell over 10 percent following its trading update yesterday, which also warned annual profit could fall by 25 percent.

The news led to a slide in other major bank stocks too, with Swan saying Australia was “not immune from developments” on global markets, which have been hit by a credit crunch and slowing world growth after a US financial crisis.

But Swan said he did not believe there was more bad news to come after regulators told him the country’s banks had made full disclosure of their exposure to bad debt.

“We shouldn’t lose sight of the fact we do have a strong, well-regulated banking sector capable of withstanding the fall-out from international developments,” he said.

ANZ shares slumped 10.93 percent to their lowest close since September 2001 at A$15.81 after the bank said its provision for second-half losses was A$1.2 billion (US$1.1 billion), against the first half’s A$980 million.

Other banks were also down, with Commonwealth Bank losing about 5 percent to A$41.10, National Australia Bank falling 2.86 percent to A$25.80 and Westpac dropping just under 8 percent to A$20.33.

NAB said on Friday it would set aside an extra A$830 million to cover losses, in addition to a charge of A$181 million the country’s second-biggest bank had taken previously.

ANZ said its underlying business was still solid but that it faced global credit problems, a weak New Zealand economy and a softening Australian economy.

Chief executive Mike Smith said ANZ expected a cash profit of more than A$3 billion this year, but added in a conference call that having to announce the provisions was “beyond disappointing.”

“No chief executive likes to announce news like this. Our shareholders, our staff and our customers have a right to expect better,” he said, ahead of the completion of a review of ANZ’s securities lending business due next month.

Swan said bank executives needed to take responsibility for their decisions.

“What we are dealing with here today in terms of the ANZ and their chief executive has made it very clear, is that we are living with the consequences of some poor investment decisions that in fact go back years,” he said.

Reserve Bank of Australia assistant governor Guy Debelle said banks had been taking steps to raise cash by issuing bonds as a precaution against further global credit market turmoil.

“The major banks are generally ahead on their funding plans,” he said.

A default crisis in subprime US mortgages erupted last year. It led to huge losses in securities whose value is linked to the home loans, sparking a global credit crunch and slower world economic growth.
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