anz has the most risk

I wont dwell on the points I have been making for past 3 months being vindicated , but anyone thats been following the ANZ debate will acknowledge that this Citi report mirrors my commentary on HC

http://www.theaustralian.news.com.au/story/0,25197,24036911-643,00.html


ANZ is the big local bank most at risk

Katherine Jimenez | July 18, 2008

ANZ Bank has been singled out ahead of other big Australian banks as most at risk of further material provisions because of its long credit default swap positions, potentially running to $2.4 billion, based on international comparisons.

National Australia Bank is not far behind in the structured credit risk stakes.

According to a detailed note by investment bank Citi, which looks at the structured credit exposures of the top four banks, ANZ's big counterparty risk on CDS portfolios and NAB's large conduit liquidity line exposure "sees us select ANZ and NAB as the most likely to incur provisions in future related to their dealings in these products".

ANZ's CDS exposure is estimated to be $23 billion, the highest of the big four.

"With a long CDS exposure of $23.4 billion, with many counterparties thought to be insurance companies subject to negative credit watch, we believe there is a very real possibility for further material provisions in future," the note says.

"It is easy to envisage additional provisions of a similar magnitude to those already disclosed ($200 million each) or potentially much larger ($1 billion to $2 billion) given where international benchmarks appear to sit."

In February, ANZ was forced to make a provision of $226 million related to US monoline insurer ACA Capital, after the insurer's credit rating was reduced.

"While it is difficult to know the counterparties involved ...we believe that around half of their open contracts are with other monoline insurers, many of whom may be subject to further ratings downgrades or are on negative credit watch," the note says.

In response, an ANZ spokeswoman said: "We have already disclosed an individual provision of $226 relating to an unrealised mark to market loss associated exposure to a US monoline insurer from which we had purchased credit protection in a credit intermediation trade."

She said although the mark-to-market position had improved since March 31, the CDS market continued to be volatile.

"Given the quality of the overall portfolio, we continue to expect the provision related to the US monoline insurer transactions to reverse in future periods," she said.

NAB's provision of liquidity lines to conduits, at $14 billion, is estimated to be at least twice the exposure of the other top four, including some US sub-prime assets.

NAB warned last Friday that its US bad-debt provisions could blow out beyond initial estimates, after revealing its $US1.1 billion collateralised debt obligation portfolio had "deteriorated".

Based on international comparisons undertaken by Citi, it estimates further potential provisions for NAB could be up to $2.1 billon, related to CDO exposures via conduit liquidity lines. Citi's international benchmarking was based on analysis done by its US colleagues.

"As an illustration of potential provisions for banks that have participated in this type of business, (US Citi) estimate that monoline related write-downs for 2Q08 could be in the range of 10-20 per cent of total notional exposure," it says.

"CDO related provisions for 2008 could be in the range 10-15 per cent of total notional exposure".

And according to Citi, that could translate to further potential provisions for ANZ of between $1.2 billion to $2.4 billion related to monoline counterparty risk. NAB's related CDO exposures via conduits could potentially be $1.4 billion to $2.1 billion.