Asia resilient as rates, regulation rise

how the IIB business can deliver the returns shareholders expect and what the next phase of ANZ’s super regional strategy must be. He argues the Federal Reserve’s “tapering” program should be analysed from the perspective of rising interest rates, not just less liquidity. 

Andrew Cornell:  One of the enduring concerns of shareholders is ANZ’s Asian network doesn’t deliver the returns it should. We’ve seen this in some reports from analysts and it seems to be a theme investors come back to. Are you comfortable with the network and how it is delivering?

Andrew Géczy:  Yes. If we look at our footprint, I would perhaps look to convert our representative office in Thailand into a full bank, I would look to make our rep office in Myanmar into a full licence. But otherwise I think we have the footprint right.

In a nutshell it is about more productivity. We have the right network, the right people, in some cases we might add to our products, but we have the right footprint.  So it is about how it performs.

Profitable growth is always an issue, you are always looking at return on equity (ROE). But don’t forget six years ago ANZ wasn’t even in the top 20 with Greenwich. (The survey by Greenwich Associates of the US is the most closely watched measure of corporate banking influence.)

ANZ’s corporate bank has had the fastest growth in Greenwich history. We have 1.3 million customers and six years ago it probably wasn’t even half a million. And that meant we had to make investments. Generally, in my experience, you make an investment and you get a return. The question is not the investment but how long do you wait to get a return?

The first step is to set yourself for more efficient delivery, better outcomes for customers. It’s my experience that if you set yourself up for more efficient delivery, better outcomes, ROE follows.

AC: Better efficiency sounds like one of those ambitions which is easier in theory than practice?

AG: We recently held a Strategy Delivery Forum in Singapore with 130 IIB leaders, where we focussed on four attributes - customer-centricity, stability, agility and efficiency. Customer-centricity and stability are existing strengths we must continue to maintain and evolve. Our agility and efficiency however are attributes we can improve.

Our strategy is not changing, instead there is an immediate need to improve the pace and urgency of our delivery. We must work smarter and more efficiently to take advantage of the current macro-economic environment and this is our focus right now.

AC: You’re happy with the footprint, the strategy is not changing, but is there pressure to pick up the pace, maybe via acquisition?

AG:  I am not looking to grow through a major deal, I am looking to grow by having the network operate more efficiently and in fact I’m in a part of the world that is growing more rapidly. If you look at trade flows, there’s a rule there, returns follow trade flows. We are one of the few banks that can play in that space.

If you look at Korea and Taiwan trade flows, what’s happening between Indonesia and Singapore, Vietnam and Taiwan, there are not many banks which can create those networks.

If you have that network set up and the market is decreasing, well that’s more complicated. But if it’s set up and the market is growing at double digit rates - the fastest growth in Asia is intra-Asian flows, China trades more with Asia than it does with the US now – well then you find yourself in a rather good position.

AC: The issue of ANZ’s partnerships in the region comes up often and indeed Mike Smith has noted that without a path to control or another over-riding imperative such as regulatory constraints, he would be happy to relinquish some partnerships, including Panin Bank in Indonesia.

AG: I think one of the great talents of Mike is he has the ability to see long term. So if we made the decision to change, let’s say we disposed of one of our partnerships, not because it’s not working or not delivering results, but because of Basel III and the shift in capital rules, then they are some trade-offs with the path to control and capital. But I think it will be a natural progression.

AC: If that happened wouldn’t it leave an earnings hole and limit the ability of the network to reach its earnings contribution target?

AG: Would that mean I would have to run around being more aggressive trying to do other M&A activity, just to grow?  No. I’ve felt that pressure at other banks, a number of times in my career, for profit targets, short term M&A for profits. I haven’t felt that at ANZ.

AC: ANZ has grown rapidly in the region but it is still dwarfed by the established regional giants like HSBC, Citigroup or Standard Chartered. What point of differentiation does ANZ bring?

AG: We have opened up ourselves to really servicing a part of the world that is growing quite rapidly. And we have the opportunity to grow in those corridors of trade flows, with connections.

This isn’t a matter of me competing for an Indonesian business against an Indonesian bank, this is me competing for an Indonesian business that wants to do business in Australia or China or Vietnam. If I can make those connections happen, then that Indonesian company has only a few banks in the world to go to. And that’s where the real service comes to those companies, connecting them to their customers, connecting them to themselves.

If we can do that, that’s where we create value. You make it easier for them.

AC: But against the big guys?

AG: A couple of observations about the competition – and setting aside the other Australian banks – when you look at the other global players, the Citis of the world, the Standard Chartereds, they built up a cost infrastructure which in a post GFC, post Basel III period, is a very expensive cost structure.

Post a lot of new global regulation, like OTC derivatives, FATCA (the US mandated Foreign Account Tax Compliance Act), it is a very expensive cost model. So quite naturally they are spending their time with what they will shut down, not where they are making new investments. They just have too big a cost base. It’s all about getting that cost base down.

Citi has a similar cost challenge but Asia will have to be part of that cost challenge and Asia won’t get the investment because of the cost reduction strategy.  And StanChart - the stories are well known, suffice to say their focus is not fully on customers.

Our competition also has problems in other parts of the world which impacts their ability to focus on local issues and provide the inter-connectivity within Asia that we can. You see that in the Greenwich results and our ability to take market share, particularly in Asian corporate banking.

AC: Are you concerned that the “tapering” of quantitative easing, the supply of easy liquidity, is going to have a disproportionate impact on emerging economies, including in Asia, and may in fact drive some credit quality issues?

AG: I think this notion that tapering is going to have some impact on local economies is overdone. You have relatively strong economies across Asia, relatively strong financial systems – that is, the banks are in relatively strong financial health.

Tapering is fundamentally about a rise in interest rates.

Now there are financial systems which cannot withstand this lift in interest rates but I don’t see the Asian economies as being overly exposed. I see Turkey and Argentina, and their financial systems, if there was some rise in interest then maybe those systems couldn’t support the economy.

There are some economies, in Asia, where historically there has been anxiety, and last summer that would be India. But if you look at the market outflows from the Indian economy this year, from foreign investors, in January this year, all those outflows have come back in to India. That would have been the only economy, across the region, where you might have sat up and said if there is a big risk, that’s where.

AC: And indeed the most recent financial flow data we have seen for Asia supports that view. But what about for ANZ in the region?

AG: Certainly a rising interest rate environment, which is what tapering will imply, means there are some parts of our business that will benefit from a rising rate environment and some parts that will require rethinking as a result of a rising interest rate environment. I don’t see tapering as being one way, negative or positive, but it will mean rising interest rates. It will also have an impact on the US$/A$ exchange rate, the US$ will get stronger, and that might help certain of our business customers who do a lot of exporting.

But I don’t see credit quality issues. Now there may be an issue of access to capital, that companies that want finance might not find it so easily. Not bad debts though.