Thursday, 24 April 2008

ANZ result sign of things to come?

Yesterday ANZ reported a -14% decline in cash earnings (cash earnings is what you need to pay attention to) and a -16% decline in cash eps for 1H08. A lot of that had to with the sharp increase in loan loss reserves which was flagged to the market back in February.

At that time I raised the prospect that ANZ could see close to $1 billion dollars in loan loss reserves in FY08. That was a big underestimation on my part as they took close to the $1 billion in the first half alone.

It would be easy to dismiss this result as due to provisioning against a couple of one off credit exposures, however that is the nature of the business and particularly as we approach a turning point in the credit cycle. This comment from CEO Michael Smith should be taken as a warning sign of things to come:

"The global environment is challenging and in areas like retail sales we are seeing early signs of a downturn in our domestic markets,"


battiwallah said...

For three reasons why the US economy is heading south, see the following:

Be afraid, be very afraid...

The Fundamental Analyst said...

Whilst it is true that the stockmarket tries to look past the economic data, it often gets it wrong. For exampe where was the stockmarket looking at the end of October last year?

The claim that all the bad news is 'priced in' seems premature to me. Only time will tell. From the peak in March 2000, the S&P lost -28% in just over a year. The market then subsequently rallied 19% in about seven weeks, before dropping -26% over the next 4 months.

That was followed by another rally of 21% over about a 3 month period, whihc subsequently failed to gain momentum with the market falling another 34% before bottoming out.

Of course, that doesn't it will play out the same way again, just that it's useful to understand the nature of bear markets.

Dean said...

Exposure to US monoline insurer ACA, Centro, Tricom, Opes Prime - God know who's next - makes you wonder if they have any risk management/business risk models or processes at all. Glad im not a shareholder, otherwise id be looking for some board level sackings. The RBA must be watching with considerable concern given that ANZ are one of the four pillars on aussie banking.

The Fundamental Analyst said...

It is definitely cause for concern dean. The problem is, you don't know what else the banks are exposed to until something blows up. The banks weathered to bankruptcy storm very well during 2001 - 2003 however this time round much more leverage and exotic financial instruments have been employed. We defintiely haven't hear the last of the problmes at Aussie banks IMO.