Australian-owned bank ANZ says its profits in New Zealand will fall by about 10% as it raises provisions to cover lending losses in a contracting economy.
Australia's third-largest lender owns the ANZ and National Bank retail banks in New Zealand. It says full-year earnings will be hit by tightening global credit markets and slowing economic growth.
ANZ says its underlying business is performing well, and its full-year profit before provisions is expected to rise 8% on the previous year. It is forecasting a cash profit of more than $A3 billion.
But higher lending costs and a downturn in its key markets will make itself felt in its credit impairment costs.
Provisions for bad and doubtful debt will rise 22% to $A1.2 billion in the second half of the financial year.
ANZ says the New Zealand economy is contracting, and credit growth has stalled as people and firms battle high interest rates and surging fuel and food costs.
As a result, the bank says profit growth will be flat, and once an increase in credit impairment costs are factored in, profits will fall by 10%.
It says individual provisions are likely to be three times the low levels it experienced last year, while losses on commercial and corporate lending have also increased.
ANZ shares plummeted on the news, dropping $A1.94 to $A15.81 across the Tasman, a fall of nearly 11%, and falling $2.51 in New Zealand to $20.50.
But chief executive Mike Smith says the increased provisions are a dark cloud over an otherwise strong underlying business.
It says its 2008 cash earnings per share are likely to be between 20% and 25% lower than last year because of higher credit costs.
Earlier, National Australia Bank, which owns Bank of New Zealand, said $A1.2 billion of securities backed by United States home loans was almost worthless.
Australian Treasurer Wayne Swan has sought to allay fears over the health of the Australian banking sector, saying it is in a position to withstand the volatility on the global credit market.
Mr Swan says the banks are strong and well regulated and have been transparent with the market about their financial position.