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Profit shock dims ANZ outlook

        ANZ has shocked financial markets with a 28 per cent plunge in profit, dragged down by escalating bad debts, loans in arrears and punishing hits from the worsening rush of corporate collapses.
  Australia's fourth-largest bank recorded a net profit of $1.42 billion, down from $1.96 billion in the March first half, and came as the board was forced to slash the interim dividend by 26 per cent to maintain future profitability and capital levels.
  The result -- which sent ANZ's shares tumbling down 7.4 per cent to $15.40 -- is seen as an indication that Australian banks were not immune to the fallout of the global financial crisis, which has crippled profits at the major international institutions.
  The drop in profit was coupled with the chief executive Mike Smith's grim forecast that the economy was only two-thirds of the way through the current downturn.
  He warned the bank would not meet its previous guidance for flat annual earnings growth because full-year bad debt provisions were expected to rise beyond the $2.5 billion.
  ANZ's bad debts more than doubled, from $681 million to $1.37 billion, which prompted the bank to warn there would be a 35 per cent increase in future provisions.
  A key measure of banking profitability, the cash profit which strips out volatile and one-off items, dropped 42 per cent from $1.67 billion to just $954 million, well below the market's expectation of $1.2 billion result. The result was among the worst in ANZ's recent history.
  Mr Smith said the result was "credible" given current global economic and market conditions, which were forecast to worsen as the downturn began to enter the middle market of corporate Australia.
  "The cycle comes in three stages: the first is the big ticket, the larger end of town, and it picks on the business models that don't work any more; they are the ones that are highly leveraged and high-profile names," Mr Smith said.
  "The second is the middle market, and the third is the small-to-medium enterprises and the consumer side of the economy, which is driven by unemployment, and that happens as a result of the first two stages. "In good times badly run companies can make money, but right now they can't. Good companies will still make money, but poor companies will hit the wall.
  "I think for all the banks in Australia, the credit quality is not as good as it should be."
  The bank's dividend was cut from 62c to 46c, down 26 per cent. Mr Smith revealed the bank was looking to alter its payout ratio.
  ANZ currently gives an estimate in dollars for annual dividend guidance, but the bank may consider expressing the ratio as a fixed percentage of profit.
  "We would have to talk to shareholders about that before we do that; it makes sense because everyone knows where they stand," Mr Smith said.
  Despite the profit fall and grim outlook, the ANZ has followed its rivals, lifting earnings from its mortgage and lending book.
  The net interest margin, which charts how much the bank earns on its loans compared to the interest cost of accounts, has grown from 2 per cent in March last year to 2.22 per cent.
  The improved margin came as the bank's interest income rose from $3.78 billion to $4.82 billion.
  The higher profits will put pressure on the major retail banks to pass on the full benefits of future interest rate cuts from the Reserve Bank. The ANZ was among the majority of banks that passed on just 10 basis points of the RBA's 25 basis point cut ordered in early April. Mr Smith said the banks wanted to deliver the full benefits to customers, but were still hamstrung by high wholesale funding costs.
  "The official cash rate has got nothing to do with our funding costs. Let's make that very clear," Mr Smith said. "But passing on rate cuts is obviously in our interest and we will always pass on as much as we can. It helps our customers ... you want to relieve as much pressure as possible on individuals and corporations.
  "People sometimes think that the banks are one side, that the Government is over there and consumers are in the middle, but we are all on the same side.
  "The funding costs that we have had to pay have been higher than they were previously."