A two-day rally to start the week has given way to yet another Greece-and-Europe-driven selloff on the Australian Securities Exchange (ASX), as the main stock benchmark Down Under shed 1.3 percent in Wednesday trade in Sydney after Reuters reported that it had seen a memo issued by the Euro Working Group (EWG) calling for eurozone countries to prepare policies that would lead to an “amiable divorce” should Greece exit the common currency.

Australia’s biggest trading partner in Europe is the United Kingdom, which is outside the eurozone but is of course intimately tied to the Continent. No European Union members show up among the top five export destinations for Australian goods and services for fiscal 2011, though Germany ranked No. 4 of those countries that import to Oz.

But the European Union as a whole did account for 13.5 percent of Australia’s total trade in fiscal 2011. And Australia’s banks, forced to compete hard for relatively a limited number of domestic depositors, have traditionally relied on European capital to fund operations.

Of greatest concern, however, is that China’s already slowing economy will suffer even more due to events in the Occident. China was Australia’s largest individual two-way goods and services trading partner in 2010-11, accounting for 19.7 percent (AUD113.3 billion) of total trade. Japan was the second-largest, accounting for 11.8 percent (AUD67.7 billion), followed by the US at 8.8 percent (AUD50.6 billion).

Australia and New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) is a good place to start with an explanation of what’s happening on the Australian Securities Exchange this month, because of what it must do on international markets to continue funding loans as well as for its expanding presence in the Middle Kingdom and elsewhere in emerging Asia.

The stock, an Australian Edge Conservative Holding and an original member of our Model Portfolio, is among the biggest losers on the ASX this month, with a price-only decline of more than 13 percent that’s erased most of what had been an impressive 2012 total return.

Last Friday in Melbourne ANZ CEO Mike Smith caused a bit of a stir that fed into an already out of control downside frenzy on the Australian Securities Exchange (ASX) when he said that overseas funding markets were “closed again,” explaining that “this is what happens in this sort of situation.”

What Mr. Smith meant was that his bank’s as well as the rest of Australia’s Four Pillars’ access to finance for operations and risk management, in addition to traditional demand deposits from its domestic clients, had dried up due to the “situation” in Greece and Europe.

The other three of the Four Pillars–so called because of a law of Australian parliament that prohibits mergers between and/or among the major banks Down Under–are Commonwealth Bank of Australia Ltd (ASX: CBA, OTC: CBAUF, ADR: CBAUY), National Australia Bank Ltd (ASX: NAB, OTC: NAUBF, ADR: NAUBY) and Westpac Banking Corp (ASX: WBC, NYSE: WBK).

In a statement released later on May by ANZ Mr. Smith provided more nuance, noting, “European funding markets are essentially closed at the moment because of the uncertainty in Europe however Asian and US markets remain open.”

Mr. Smith added, “While we will see volatility as the European crisis unfolds, the situation is more manageable than 2008, when we had the shock collapse of Lehman Brothers, and Australian banks are well placed right now.”

ANZ has already completed its 2012 funding, and it’s had two years to anticipate and plan for the scenario unfolding in Greece and southern Europe. “It’s difficult to say what it will mean for funding costs but we need to bear in mind recent pressures have been caused by the cost of domestic deposits and that won’t change anytime soon,” Mr. Smith said.

Australian banks raise about AUD100 billion a year from wholesale funding markets to cover the gap between total loans and deposits. All of the Four Pillars have completed the majority such requirements for the year. ANZ has closed about AUD17 billion worth of debt deals during its fiscal 2012, which ends Sept. 30, 2012, including AUD8 billion of covered bonds.

This represents approximately 87 percent of its overall needs for the fiscal year. Nevertheless, ANZ, which had put together a strong rally in calendar 2012 on the strength of exposure to the broader Asian economy, is down 13.6 percent on the ASX this month. Commonwealth Bank, meanwhile, has shed only 4.9 percent in price-only terms, National Australia 6.1 percent. Westpac, which like ANZ had built a mid-double-digit price-only gain through Apr. 30, is off 9.9 percent in May.

More than any other Australian bank ANZ has identified itself in broader Asian terms rather than strictly Australian terms. And, despite what a skittish market may be saying in May, its approach should pay dividends in the long run.

ANZ’s revenue from the greater China region, including the Mainland, Hong Kong and Taiwan, grew 24 percent in the six months ended Mar. 31, 2012, compared to the same period in fiscal 2011. And the bank has also been granted a license to retail renminbi-based products in local markets.

ANZ is basically alone among the Four Pillars in its pursuit of “superregional” expansion strategy. Commonwealth Bank, National Australia and Westpac concentrate almost exclusively on Australia and New Zealand, traditionally safe and profitable markets where ANZ does too continue to compete.

But ANZ now has significant retail and business presence not only in greater China but also across the Pacific Islands, including Fiji, Tonga, Timor Leste and Papua New Guinea, South East Asia, including Indonesia, the Philippines, Cambodia, Vietnam and Thailand, and India.

Members of the Asia-Pacific Economic Cooperation forum, which includes 21 countries with borders on the Pacific Ocean such as China, Japan and the US, accounted for 70.9 percent of Australia’s total trade in fiscal 2011.

ANZ currently owns a 20 percent stake in both Shanghai Rural Commercial Bank and Bank of Tianjin. Its Chinese operations consist of six outlets, and it plans to increase its network to 20 outlets in the next five to 10 years, subject to regulatory approval.

In mid-May ANZ announced that it would invest another AUD300 million to support growth in its Chinese subsidiary as part of the bank’s push into Asia. The additional investment is the first since an initial investment of AUD395 million in 2010. ANZ aims to derive 25 percent to 30 percent of its profit from Asia by 2017.

ANZ is being punished this month, it seems, for its greater Asian ambitions. The stock closed at AUD23.99 on the ASX on May 1 but closed at AUD20.65 on May 23 in Sydney. It now yields about 7 percent.

The latest news out of Greece is not really news at all, as the possibility of its exit from the euro has been bandied about for months now. Nor should it come as any surprise that European officials may be making contingency plans.

This will not be a clean, concise break, either, as even after two years to prepare for the worst there will still be further writedowns for other European banks based on exposure to Greece as well as a further flight of deposits and rising defaults. This would impact the cost of that portion of its wholesale funding ANZ–and the other Four Pillars–may seek from Europe.

But ANZ–and its peers–still have access to Asian and North American sources of funding. And Chinese Chinese Premier Wen Jiabao said earlier this week that Beijing was prepared to adopt a more proactive fiscal policy to maintain growth.

“We should continue to implement a proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth,” Mr. Wen said.

And in a statement issued following a May 23 meeting led by Mr. Wen China’s cabinet noted, “Downward pressure on the economy is increasing,” and said it would encourage private investment in energy and other state-dominated industries in order to boost growth.

The ASX/SPI 200 Future Contract was down 23 points when I began writing, indicating a negative open on Thursday in Sydney, but had swung 14 points into the green by the time I concluded.

In the short term it’s a popularity contest. Over the long term a stock market is a weighing machine, and Australia and ANZ are in pretty solid shape from this perspective.

The Roundup

If you were able to buy AE Aggressive Holding and original Portfolio member GrainCorp Ltd (ASX: GNC, OTC: GRCLF) when it dipped below USD9 per share last week–a move we advised subscribers to make in a May 18 Flash Alert–you’re already sitting on a significant gain in price-only terms.

Granted, your window of opportunity to make this move was basically Monday on the Australian Securities Exchange (ASX), when it closed at AUD8.89, or USD8.77 based on the prevailing Australian dollar-US dollar exchange rate, because on Tuesday the management of the company reported fiscal 2012 first-half earnings that spurred an 8.5 percent rally.

The stock is back above our USD9 buy-under target after posting a 36 percent increase in earnings before interest, taxation, depreciation and amortization (EBITDA) over the prior corresponding period to AUD235 million. Adjusted net profit after tax (NPAT) for the six months ended Mar. 31, 2012, was 39 percent higher to AUD122 million, primarily reflecting strong performances by the Country & Logistics and Ports businesses.

GrainCorp declared a fully franked AUD0.15 per share interim dividend, in line with the prior corresponding period, and will also pay a special dividend of AUD0.15 per share. Company policy is to pay 40 percent to 60 percent of NPAT; in strong years the company is “able to ‘flex up’ and return some additional capital” to shareholders via special dividends.

Management also revised upward its full-year fiscal 2012 EBITDA guidance range to AUD385 million to AUD415 million from AUD350 million to AUD380 million and its NPAT guidance range to AUD185 million to AUD205 million from AUD165 million to AUD185 million based on strong forward export bookings at its ports combined with improving malt sales and expected earnings therefrom.

With regard to fiscal 2013, which begins Oct. 1, 2012, and runs to Sept. 30, 2013, GrainCorp CEO Alison Watkins noted that the company continues to invest in safety and equipment upgrades on the assumption that it will be “another potentially large harvest.”

“Demand for elevation capacity is very strong, as customers seek to meet international demand,” Ms. Watkins said in a statement released by the company.

GrainCorp’s fiscal 2012 first half result was driven by higher earnings from both its grains and processing businesses, according to a company statement “demonstrating the benefits of strategic focus on deriving value from all points along the grain chain.”

Country & Logistics booked EBITDA of AUD73 million in the first half, up 87 percent, on revenue of AUD311 million, up 10 percent. Carry-in was 6 million metric tons, up from 2.6 million metric tons, and receivals were 11.6 million metric tons, down from 14.4 million. Margins increased to 23.4 percent from 13.7 percent.

Ports EBITDA was AUD74 million for the first half, up from AUD52 million in the prior corresponding period, reflecting an increase in grain export volumes to 5 million metric tons from 3.2 million. Management upgraded full-year export volume guidance to 10 million metric tons from a prior range of 8.8 million to 9.8 million.

The Marketing business had profit before tax of AUD26.6 million in the first half, up from AUD25.1 million, on revenue of AUD936.8 million, up 41 percent, and marketed volume of 3.9 million was up 34 percent.

The first-half result included a net gain on derivatives and commodity inventory of AUD55 million, up from AUD40.4 million in the prior corresponding period.

The majority of the AUD55 million related to Marketing, with a small element relating to the Malt business. Regarding the Marketing component, about AUD39 million, or 75 percent, was realized, while AUD14 million was unrealized. The unrealized portion represents the mark-to-market value of GrainCorp’s commodity inventory and hedging positions at the end of the period.

GrainCorp’s Marketing efforts are focused on buying and selling grain by linking growers and end-users via its supply chain expertise; the company manages the risk related to holding this grain in its supply chain by hedging its grain positions with physical or derivative contracts. The mark-to-market value reflects these positions as well as positions in unsold and hedged grain and sold but not yet delivered grain.

The Malt business reported EBITDA of AUD59.2 million for the first half, up from AUD57 million in the first half of fiscal 2011, on revenue of AUD467.7 million, up 12 percent. EBITDA margin was 12.7 percent, down from 13.7 percent in the prior corresponding period but up from 9.4 percent in the second half of fiscal 2011. Processing margins softened, but GrainCorp realized savings on barley procurement as well as efficiency improvements, and sales volume increased by 39 percent to 669,800 metric tons.

Although GrainCorp is on course to deliver strong fiscal second-half earnings a number of factors could make it pale compared to the second half of fiscal 2011. For instance, the current second half began with “carry-in” of 11.1 million metric tons of grain in storage, more than 1 million metric tons below the 12.4 million the company had going into the prior corresponding period. Year-over-year storage revenues will therefore be lower in the current second half.

As for export volumes, GrainCorp shipped 5 million metric tons in the first half of fiscal 2012, an “extraordinary volume,” according to Ms. Watkins, but due to the high level of grain available for export and good international demand the company expects to export another 5 million metric tons in the second half. This compares with 4.9 million metric tons exported in the prior corresponding period.

GrainCorp’s Marketing business had a solid period as well, selling 3.9 million metric tons for physical delivery in the first half, up from 2.9 million a year ago. The unit also closed sales that as of Mar. 31 was not yet delivered, which generated earnings in the first half in the form of unrealized mark-to-market gains.

When this grain is delivered in the second half the unrealized gain becomes realized. GrainCorp’s fiscal 2011 Marketing profit per metric ton was well above the historical average, and management expects activity in the second half to be at a more normal level of dollars per metric ton than the prior corresponding period.

Operating cash flow for the first half was AUD42.2 million versus AUD133.7 million in the prior corresponding period, the decline reflecting an additional tax of AUD81 million GrainCorp paid in the half due to the lagged effect of its increased earnings in fiscal 2011.

GrainCorp’s cash flow over the year reflects the seasonal nature of its business. In Storage & Logistics the company sees a large build-up of working capital in the first half that unwinds in the second. There are seasonal fluctuations for Malt as well, though management has used its barley procurement program to smooth these out. The commodity inventory associated with Marketing is funded by a short-term trading facility that matches the life of those assets and so typically varies from period to period.

GrainCorp had net debt of AUD605.5 million as of Mar. 31, 2012, down from AUD755.6 million a year earlier. Excluding grain inventory held by the Marketing business, which is funded with short-term financing facilities, core debt was AUD218.8 million, down from AUD227.2 million. Core gearing was 13.3 percent, down from 14.6 percent.

Running on all cylinders in an environment where strong demand for its services looks set to continue for the foreseeable future, GrainCorp is a strong buy on dips to USD9.

Conservative Holdings

• AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY)–Aug. 22, 2012 (estimate, FY 2012, end Jun. 30, 2012)
• APA Group (ASX: APA, OTC: APAJF)–Aug. 21, 2012 (estimate, FY 2012, end Jun. 30, 2012)
• Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF)–Jul. 26, 2012 (confirmed, CY/FY 2012 1H, end Jun. 30, 2012)
• Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY)–May 2 Down Under Digest
• Cardno Ltd (ASX: CDD, OTC: COLDF)–Aug. 16, 2012 (estimate, FY 2012, end Jun. 30, 2012)
• CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–Aug. 21, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• Envestra Ltd (ASX: ENV, OTC: EVSRF)–Aug. 27, 2012 (estimate, FY 2012, end Jun. 30, 2012)
• M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF)–Aug. 29, 2012 (estimate, FY 2012, end Jun. 30, 2012)
• Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–Aug. 9, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• Transurban Group (ASX: TCL, OTC: TRAUF)–Aug. 2, 2012 (confirmed, FY 2012, end Jun. 30, 2012)

Aggressive Holdings

• BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–Aug. 22, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• GrainCorp Ltd (ASX: GNC, OTC: GRCLF)–May 23 Down Under Digest
• Iluka Resources Ltd (ASX: ILU, OTC: ILKAF, ADR: ILKAY)–Aug. 23, 2012 (confirmed, FY 2012 1H, end Jun. 30, 2012)
• Mineral Resources Ltd (ASX: MIN, OTC: MALRF)–Aug. 20, 2012 (estimate, FY 2012, end Jun. 30, 2012)
• Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY)–Aug. 13, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• New Hope Corp Ltd (ASX: NHC, OTC: NHPEF)–Sept. 20, 2012 (estimate, FY 2012, end Jul. 31, 2012)
• Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–Jul. 24, 2012 (confirmed, FY 2012 1H, end Jun. 30, 2012)
• Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–Aug. 23, 2012 (estimate, FY 2012, end Jun. 30, 2012)
• Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–Aug. 8, 2012 (confirmed, FY 2012 1H, end Jun. 30, 2012)
• WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY)–Aug. 29, 2012 (estimate, FY 2012, end Jun. 30, 2012)