News: DSH PREVIEW-Australian banks face earnings drag as bad debts climb

• Westpac to kick off bank earnings on Monday
• ANZ estimated to post over 5 pct fall in H1 cash profit
• NAB to see H1 cash profit growing about 2 pct
• Bad debt, dividends in focus - analyst
• Analysts downgrade EPS estimates for banks by 1-2 pct

A bad debt blowout is likely to end a dream run of six straight years of record profits for Australia's banks as they report half-yearly earnings next week, piling pressure on a sector already on the defensive over a series of financial scandals.

The increase in bad debts of about A$3.4 billion ($2.62 billion), according to an estimate by UBS, could pull interim earnings for at least one of the top four lenders lower, while the others should continue to see profit growth albeit at a slower rate than during the heyday of the commodities boom.

Dark clouds are gathering over Australia's financial sector, which sailed through the global crisis but now faces slowing profit growth, rising defaults linked to the commodities price bust and questions over corporate responsibility in an election year when bank misconduct is shaping as a hot issue.

"This is going to be an interesting time for the banks. Capital management and asset quality are the two main issues," Bell Potter analyst TS Lim said.

No.4 lender ANZ Banking Group (ANZ) will post an over 5 percent drop in cash profit for the six months to March on Tuesday, the first such fall since March 2009, according to Thomson Reuters I/B/E/S, marking the end of six golden years of consecutive record profits for the so-called Big Four lenders.

Analysts have downgraded earnings per share estimates for each of the four major banks by 1-2 percent, weighed by concerns about credit quality and dividend cuts.

Australian bank shares are among the worst performers on the benchmark index (xjo) so far this year, down 5.6 percent to 13 percent.

DEBT DISTRESS The Big Four have together lent about A$66 billion to the resources sector, about 1.8 percent of their combined loan book of A$3.6 trillion, latest filings show.

ANZ is the most exposed, with its mining book at 2.2 percent of total loans. Last month, ANZ warned that bad debt charges for the first-half-ended March could almost double.

"Many people are expecting a dividend cut from ANZ. Some of the large single-name corporate exposures are going to cause an increase in bad debts but it's not a systemic issue," Bell Potter's Lim said.

The banks have also had to wear exposure of more than A$3 billion to several high-profile corporate collapses in recent months, including those of steelmaker Arrium (ARI), retailer Dick Smith (DSH) and mining magnate Clive Palmer-owned Queensland Nickel.

But the banks should not expect any sympathy from the Australian public after a string of scandals over wealth mismanagement, insurance scams and benchmark interest rate rigging has tarnished their reputations.

Hoping to head off opposition Labor Party calls for a high-powered judicial probe into the industry, the Australian Bankers Association last week promised unprecedented reforms to protect consumers and boost transparency.

No.3 lender Westpac Banking Corp (WBC) will kick off bank earnings on Monday with cash profit expected to grow by 7.7 percent for the six months-ended March 31.

For top lender National Australia Bank (NAB) that measure is likely to grow by around 2 percent to A$3.35 billion when it reports on Thursday, according to the I/B/E/S estimates.

No.2 lender Commonwealth Bank of Australia (CBA) follows a June-ending calendar year and will report third quarter numbers in May. ($1 = 1.2955 Australian dollars)