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ANZ forecasts $100 million blowout in bad debts

Australia and New Zealand Banking Group (ASX: ANZ) has warned that its total bad debt charges for this half of the 2016 financial year will rise by an additional $100 million, thanks to the bank’s exposure to the resources sector.

In mid-February, ANZ said it expected its total bad debts to be ‘a little above $800 million for the first half of 2016’. Now the bank says, “Recent developments with these institutional exposures however mean the total Group credit charge for the first half is expected to increase by at least $100 million.” [emphasis mine]

Acting chief financial officer Graham Hodges said, “While the overall credit environment remains broadly stable, we are continuing to see pockets of weakness associated with low commodity prices in the resources sector and in related industries.” [emphasis mine]

Iron ore, coal, copper and oil prices have fallen dramatically from a year ago.

Iron ore averaged US$62.69 a tonne in February 2015 but spot iron ore prices fell as low as US$38 a tonne in December 2015, and the commodity price is expected to fall in the second half to average around US$40 a tonne.

Thermal coal averaged US$65.79 a tonne in February 2015 but averaged US%54.54 a tonne last month.

Copper was at US$5,729 a tonne in February 2015, but is now around US$5,000 a tonne, and Brent Crude Oil was at US$57.93 a barrel in February 2015 – it’s now at US$40.52 a barrel according to Bloomberg.

The problem for the banks is that the low commodity prices aren’t just affecting miners like Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP), but also adjoining sectors like mining services, construction companies, other contractors servicing the resources sector, including utilities, engineering and building companies.

Foolish takeaway

In the scheme of things, $100 million isn’t all that much for a bank the size of ANZ. What is worrying is if this is the start of a trend, and the implications for the other major banks Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC).

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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