ANZ Bank's third quarter profit rises

Sydney: Australia & New Zealand Banking Group, the best-performing bank in Sydney this year, said third-quarter profit rose 37 per cent as bad debts shrank.

Net income rose to A$1.3 billion (Dh4.2 billion) in the three months ended June 30, the Melbourne-based bank said in a statement yesterday. Provisions for soured loans in the quarter were 38 per cent lower than the first-half average.

The bank said this week it's studying the books of Korea Exchange Bank before a purchase that Citigroup estimated may cost as much as A$6.5 billion. Chief Executive Officer Mike Smith said yesterday that KEB would "unquestionably" fit with efforts to expand into Asia as competition increases at home and a pickup in business lending is deferred until next year.

"Banks are trying to get into the business market but it's proving very difficult," said Matthew Kidman, who oversees about A$400 million at Wilson Asset Management in Sydney. "There's a bit of a hole in their earnings and I don't think margins are going to improve in the short term. You're going into the doldrums."

ANZ Bank's shares rose as much as 1.5 per cent to A$22.73 and traded at A$22.68 as of 10.48am in Sydney, paring this year's decline to 0.9 per cent.

Softer growth

"Domestic credit growth will continue to be softer than we saw pre-crisis," Smith said.

On a call with analysts discussing loans to Australian businesses, Smith said: "We do have a lot of deals that are waiting to go that people are still reluctant to move on. It's actually going to be next year when we see that move. There is pent up demand."

Group margins excluding the global markets business "have increased modestly, but growth is slowing," the bank said in the statement.

Investors are focusing on margins, even as profits rise at Australia's largest lenders, because banks are still paying more to raise funds on international debt markets, three years after the financial crisis started.

Rising costs in debt markets means banks are also paying more interest to depositors at home, putting additional pressure on the profitability of the lending model.

Global doubts

According to Moody's Investors Service, ANZ Bank and National Australia Bank, the nation's largest business bank, need to raise as much as A$25 billion each year selling long- term bonds to help fund lending. Commonwealth Bank of Australia, the country's biggest lender, and Westpac Banking will need as much as A$50 billion, Moody's has said.

As margin pressure mounts, a recovery in credit demand in Australia has also been delayed amid doubts over the strength of the global economic recovery, according to bankers at Commonwealth Bank and National Australia Bank.

National Australia Bank Chief Executive Officer Cameron Clyne said this month that demand for corporate loans may not return until 2011, instead of 2010, after a market slump worldwide. ANZ Bank, seeking to increase the proportion of income generated from Asia to 20 per cent, said on August 16 that it started due diligence for a possible acquisition of a 57.3 per cent stake in Seoul-based Korea Exchange Bank, the lender put up for sale by Dallas-based Lone Star funds.

Lone Star, the buyout fund controlled by John Grayken, has tried for four years to sell its holding in Korea Exchange Bank as regulators examined the circumstances of its investment in the lender. The bank has said it expects Lone Star to complete the sale of its stake this year.