Banks downgraded in debt blowout

THERE's been a rash of earnings downgrades for the banking sector, with predictions of a $1.4 billion blowout in bad debts in 2008.

Banks downgraded in debt blowout

ANZ'S surprise $US200 million ($217 million) provision for exposure to a US bond insurer has caused a rash of earnings downgrades for the banking sector, with predictions of a $1.4 billion blowout in bad debts in 2008.

As bank share prices recovered from Monday's rout, Merrill Lynch forecast a 60 per cent jump in provisioning levels.

But this is well short of a disaster scenario. It assumes a more benign environment than in 2001-02, when there was a large increase in bad debts with notable corporate failures such as local metals group Pasminco and US corporates Enron and Worldcom.

Analyst Matthew Davidson said bank exposures to financial engineers and credit derivatives were the problem areas to watch, but with recent share price falls the risk of a shift in asset quality had now been factored in.

"A further de-rating requires systemic concerns over credit quality,'' he said, arguing that such fears were ``overdone''.

In a trading update on Monday, ANZ unveiled a $360 provision dominated by a derivative exposure to a US monoline insurer.

The announcement caused a wave of selling in bank stocks, as ANZ led the sector down with a $1.45, or 6.1 per cent, plunge to $22.46.

The bank recovered some ground yesterday, gaining 14c to $22.60.

However, it was not enough to stop Westpac, which rose 65c to $23.15, overtaking ANZ and assuming third position in the hierarchy of the nation's most valuable lenders.

The Commonwealth Bank, was up $1.27, or 2.9 per cent, to $45.27, while National Australia Bank rose 95c, or 3.2 per cent, to $30.46.

Deutsche Bank said the outlook for the sector was "challenging'', with rising commercial loan losses and wholesale funding spreads still expanding.

It said more variable interest rate rises in excess of shifts in the official cash rate were likely.

Credit Suisse downgraded major bank profit estimates by up to 10 per cent over the forecast period out to the 2010 financial year.

The biggest adjustment was higher bad debt charges, but the investment bank also assumed eroding interest margins.

It said an examination of share prices showed the re-rating of the sector was now  "substantially complete'', if the point of comparison was the 2001-02 blowout in bad debts.