ANZ 0.45% $24.59 australia and new zealand banking group limited

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  1. 3,715 Posts.
    Audience All | Date 20 Feb 2008

    Questions and Answers

    The following Q&As have been prepared to help you understand the Trading Update on Monday and how the market (including investors and the media) has reacted.

    1. What did we announce to the market yesterday and why did our share price drop following this news?

    In addition to reporting our interim results in April and full year results in October, ANZ provides the investment market with trading updates after 4 months and 10 months of trading.

    In the four month trading update provided yesterday, we said that our underlying business is in good shape and our underlying profit growth (our revenue less our expenses) was on track to exceed 2007 growth rate of 11.5%.

    The trading update however also flagged there 3 large provisions (a provision for losses expected on loans and derivative positions) expected this reporting half which will be deducted from the underlying profit. The market now expects our Net Profit growth will be negligible in 2008.

    With expectations of flat profit and concerns that this is the onset of larger Corporate losses for the financial sector (as already suggested by last week’s CBA results announcement) share prices across the major banks dropped.

    2. If our underlying business performance is good, why did the market react so negatively to the news?

    Credit quality is front and centre of market concerns at the moment with the message around good underlying performance overshadowed by the market's focus on credit costs. There was also some concern about the continuing high level of cost growth which we flagged.

    There is also a strong view in the market that hedge funds are driving a substantial portion of trading in the bank sector at the moment. This normally means at some point they will have to start unwinding positions which would ease downward influences.

    3. Is it just ANZ that is experiencing a downturn in share price performance?

    Although it may be of small comfort, whilst ANZ are now down around 15% since the AGM it has actually been worse for our peers, even after yesterday's events. CBA and St George have lost 25% over the same period.

    In fact, since the AGM, ANZ has actually outperformed the All Ordinaries Index, until mid last week.

    4. The announcement mentioned that it was the impacts of a small number of clients experiencing difficulty - as well as some transactions we undertook some time ago (monoline exposures and credit intermediation activities) - that will impact our profit this year.

    What was the ‘monoline’ provision?

    The largest provision mentioned in the trading update was $200m for a monoline insurer (a monoline insurer is effectively an insurance company set up to provide insurance on various financial assets such as bonds and derivatives). ANZ purchased credit insurance/protection over a basket of corporate names from the monoline insurer, and then onsold this credit protection to other institutions. These are credit protection intermediation trades.

    As a result of the potential failure of a monoline insurer from whom we purchased credit protection, ANZ was required under the accounting rules to raise a provision for the “Mark to Market” amount (the exposure at risk based on current market values).

    However ANZ only has to pay out under the credit protection policy we sold if around 20% of the corporate names within the portfolio default. As this is extremely unlikely, we expect the provision will unwind over time as the transactions reach maturity.

    ANZ also has credit protection intermediation activities with a number of counterparties. The matched nature of these trades removes market risk, and the counterparties are all rated AA or better.

    5. How are ANZ’s retail customers coping with the current increasing interest rate environment?

    We’re seeing strong deposit growth, greater than normal repayments on mortgages and strong new mortgage approvals.

    Generally, consumer credit quality in Australia is pretty good and we expect losses in 2008 to be in line with the rate of asset growth.
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