ANZ Banking Group Ltd has reported a sharp fall in first half profit and says tough market conditions will continue over the rest of fiscal 2009 and into fiscal 2010.

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Net profit for the six months ended March 31 fell 28 per cent to $1.417 billion, from $1.963 billion in the previous corresponding half, after charges for bad debts and funding costs rose.

Cash profit, adjusted for one-off items and movements in derivatives, fell 43 per cent to $954 million.

Total credit impairment charges rose 28 per cent to $1.435 billion, from $726 million in the previous first half and was up four per cent from $1.364 million in the second half of fiscal 2008.

Chief executive Mike Smith said on Wednesday the global economic slowdown was impacting the bank and its borrowers and that the tough conditions would continue.

“The expected slowdown in Australia and New Zealand is now playing out with the outlook for provisions in the second half likely to be somewhat more difficult than the first half and we expect that situation to continue through to early 2010,” he said in a statement.

Asked if he would maintain the bank\’s earlier guidance for full year earnings Mr Smith said:

“No, I wouldn\’t. I expect (provisions) to increase a bit.” ANZ had previously flagged flat underlying earnings for fiscal 2009 and forecast full year provisions of between $2.4 billion and $2.5 billion. It now sees its full year provisioning “somewhat higher” than originally expected.

Mr Smith said a pick up in bad and doubtful debts on its business banking side had caught the bank by surprise.

“The effects into the commercial property market (of the downturn) have happened a bit quicker than I thought,” Mr Smith told journalists.

“In March we got a rude shock.”

Mr Smith expects Australia\’s official cash interest rate to decline further from a current three per cent over the rest of calendar 2009 but declined to give an expected number at which the rate would trough.

On the bank\’s high funding costs, Mr Smith said: “The official rate bears absolutely no relationship to our funding costs anyway.

“A lot of our term funding was written at 15 basis points – it\’s now at 280 to 300 basis points.”

“But I\’m not too worried about it.” Mr Smith said ANZ\’s margins would continue to come under pressure. “We have tried to re-price at the top end of town, where margins were unrealistic,” he said.

On ANZ\’s deteriorating loan book, Mr Smith said there would be “a little bit more for the second half I expect”.

He added that the decline in the bank\’s loan book will continue into the first half of fiscal 2010.

“We will see a hit to the commercial sector and SMEs (small and medium sized enterprises) for the rest of the calendar year 2009,” he said.

Mr Smith also said bad debt charges for the household sector are expected to rise in the first half of fiscal 2010.

ANZ\’s total gross impaired loans rose to $3.691 billion, equating to 1.03 per cent of net advances, in the first half, in a trend that is being experienced broadly across the business.

ANZ\’s first half net interest income rose 28 per cent to $4.822 billion, as customer deposits grew 16 per cent to $22 billion.

Its underlying income rose 18 per cent on the back of higher levels of recovery of funding cost increases for deposits and wholesale funding, particularly in institutional.

But Mr Smith said ANZ\’s revenue from its markets trading business was set to decline in the full year.

“The markets business will, I think, not be so good because there\’s less opportunity to position for continuing falls in interest rates – they haven\’t got much further to go,” he said.

ANZ also reported an underlying profit, reflecting the impact of credit intermediation trades, of $1.908 billion, which was up four per cent on previous corresponding period.

The result included the impact of a $US915 million charge on the credit risk of its intermediation trades with six monoline insurers and two credit derivatives product companies entered into between 2005 and February 2007.

The trades involved credit protection purchased from the counterparties against the risk the bank would have to pay out on losses incurred from corporate bond defaults.

ANZ said the portfolio of eight counterparties now has a notional value of $US11.02 billion, as at March 31.

ANZ said net underlying profit for its Australian region business, including provisions, fell nine per cent but was up 115 per cent for the Asia Pacific, Europe and America region.

The New Zealand business profit was up 25 per cent before provisions. ANZ declared an interim dividend of 46 cents, down from 62 cents in the first half of fiscal 2008.