ANZ warns of higher bad debt hit from resources exposure

SYDNEY (BLOOMBERG) - Australia & New Zealand Banking Group (ANZ) said bad debt charges will be at least A$100 million (S$102.7 million) higher than previously forecast as low commodity prices impact its resource-industry clients. The shares declined.

The expected increase comes only a month after the lender forecast its group credit charge for the period to be a little above A$800 million. The Melbourne-based bank didn't name the companies behind the increased charges in its statement to the stock exchange on Thursday (March 24).

Bad debt provisions at Australia's largest lenders are set to rise to their highest in eight years by 2018, as the chances of defaults in the mining, agricultural and dairy sectors increase, according to a survey by Bloomberg earlier this month. Investors are already jittery after profits grew at the slowest pace in six years at three of the nation's four-largest lenders in the latest reporting period.

Loans to Peabody Energy Corp, the largest US coal miner, and Australian steel and iron ore producer Arrium Ltd were among those contributing to ANZ's forecast increase in charges, two people with knowledge of the matter said. Paul Edwards, a Melbourne-based spokesman for ANZ, declined to comment on customer names.

The forecast rise reflects the "evolving position with a small number of Australian and multi-national resources related exposures," ANZ said in the statement. "While the overall credit environment remains broadly stable, we are continuing to see pockets of weakness associated with low commodity prices in the resources sector and in related industries."

ANZ shares dropped 3.8 per cent to A$24.37 as of 10:06 am in Sydney. The benchmark S&P/ASX 200 Index fell 0.7 per cent. The lender has dropped 13 per cent this year, the most among Australia's largest banks, compared with a 3.6 per cent decline for the benchmark.

"Whilst we believe to some extent ANZ's issues are company specific, ongoing commodity price weakness is likely to translate into higher losses for the sector with ANZ and Commonwealth Bank of Australia being the most exposed," Victor German, a Sydney-based analyst at Macquarie Group Ltd. said in a note to clients. "This ANZ release suggests that the deterioration that they have seen is likely to have implications for the banking sector."

Macquarie estimates ANZ and Commonwealth Bank have about A$20 billion each in exposure to the resources sector compared with A$12 billion to A$15 billion for their main competitors.

"We are continuing to monitor ANZ's exposures carefully and we will keep investors up-to-date with any changes to the credit outlook," Acting Chief Financial Officer Graham Hodges said in the statement.

Peabody Energy is on the verge of bankruptcy crippled by US$6.3 billion in debt, In a regulatory filing March 16, the coal miner said its ability to operate as a "going concern" is in doubt. Arrium, which had net debt of A$2.1 billion as of Dec 31, is seeking a US$805 million loan from GSO Capital Partners, it said Feb. 22.

ANZ reports first-half results on May 3.