Analysts cut ANZ earnings but remain split on its rating

Analysts have slashed their earnings forecasts for ANZ because of its bad debts, but are split on rating the bank.

ANZ says its bad debt charges for the first half will be at least $100 million higher than expected.

Analysts have slashed their earnings forecasts for ANZ following news of the bank’s swollen bad and doubtful debt levels, but remain divided on whether to buy or sell the bank.

Thursday last week saw ANZ inform the market its bad debt charges for the first half would be at least $100 million higher than the $800m it had predicted just last month, while Westpac added to concerns by simultaneously warning it too expected increased bad debt losses.

While ANZ bore the brunt of the downgrades, analysts also started trimming back their earnings outlook for other major banks by 1-2 per cent for the current financial year.

Brokerage Credit Suisse said the sector-wide downgrade reflected higher bad debts arising from a handful of distressed institutional credits.

“Our view at this juncture is that these problems represent isolated rather than systemic issues,” Credit Suisse analysts Jarrod Martin and James Ellis said.

Bank stocks were savaged in the two sessions that followed, with ANZ tumbling 8.4 per cent, Westpac diving 7.4 per cent, NAB falling 5.9 per cent and Commonwealth Bank giving up 4.7 per cent in a sell-off that sent the S&P/ASX 200 below 5000 points for the first time in almost a month.

Deutsche Bank cut its ANZ rating to hold from buy, sliced 2.6 per cent off its full-year earnings forecast and dropped its 12-month price target almost 8 per cent to $26, which compares with yesterday’s closing price of $23.20. Analysts Andrew Triggs and Anthony Hoo said the bank’s deteriorating credit quality felt like “death by a thousand cuts”.

“ANZ has now surprised several times on bad debts and, in an environment where companies that disappoint are dealt with harshly, this has seen the valuation gap continue to widen,” the analysts said.

The bad debt shock ignited fears over how exposed major banks are to the struggling mining sector. But analysts see that as just one of several risks for the bank, saying further downside is “impossible to rule out”.

“ANZ finds itself overweight several areas, which present concerns from an asset quality perspective,” Mr Triggs and Mr Hoo said and cited resources exposures, Asia, New Zealand dairy, and off-balance sheet contingent liabilities.

“Should two or more of these exposures deteriorate simultaneously this could present further downside risk to earnings.”

UBS cut its full-year earnings forecast for ANZ by 1.5 per cent and maintained a neutral rating on the stock. Macquarie wiped 1.7 per cent off its earnings prediction and kept an outperform ­rating, while Morgan Stanley cut its earnings guidance by 2 per cent but retained an underweight ­rating on ANZ.

“This is not the first time in the last 18 months that ANZ has underestimated its BDD charge and been forced to revise its estimate,” UBS analyst Jonathan Mott said.

“Such a track record brings to mind the old banking adage — ‘bad debts are like cockroaches, they never come in ones’.”