ANZ IIB takes less risk for more income, sees through the cycle ROE around 13 per cent

ANZ’s International and Institutional bank is more than covering its cost of capital as it moves from investment in building an Asian network to “production” and the division’s chief executive Andrew Géczy believes a “through the cycle” return on equity of around 13 per cent is appropriate for the business.

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“There is a group ROE target which you are familiar with…. Within that goal, my objective is to deliver a delta (the rate of return above an existing base) on my own divisional ROE,” he said.

“Within that, clearly, any institutional business, whether mine, or domestic or international peers, the institutional ROE is going to be different to retail ROE. This is the portfolio effect, you will have a higher ROE in retail with lower growth but with our ROE around 13 and growing faster, we can add economic value."

Answering questions at the 2014 ANZ Asia Investor Tour in Hong Kong, Géczy noted investment banks and some global banks had delivered ROEs above 20 per cent, even into the 30s, before the financial crisis but had now crashed.

“Those banks are now happy if the number is double digit,” he said. “We are above our cost of capital today and our focus is on the delta, that’s what we want to drive up.”

Géczy added there was inevitably a lag in the build up of ROE after scale, platforms and other infrastructure is built out.

Replying to a question about how ANZ was competing on the one hand with global banks like Citigroup, HSBC and Standard Chartered and the major Australian banks on the other, Géczy said ANZ had two major advantages: against the global banks, clients like the Asia Pacific focus while other Australian banks did not have the networks and on-the-ground depth of coverage.

“When I look at some of our international competitors I see problems that don’t have anything to do with Asia,” he said. Those problems, whether in America or Europe, meant these banks didn’t have the focus on Asia and were also withdrawing investment from the region.

Moreover, it suited many clients that ANZ specialised in Asia Pacific because it allowed clients, particularly other financial institutions, to regiment their activities and not have to deal with a bank in Asia that then wanted to extend the business to Latin America or Europe.

“That’s why we are gaining market share and on measures like Greenwich (the most widely watched survey of bank performance in Asia),” Géczy said.

“There are compelling volume characteristics around my business and we don’t think about the RoE in isolation to that. I have a number of products and segments that are not only high ROE but very high volume. And thinking about life from the customer point of view, it’s the aggregate RoE that is delivered through better relationships.”

The head of risk for IIB Doug Stolberg told the investors and analysts at the forum credit quality performance at the bank was improving despite the business growing faster. The risk team together with transaction and relationship bankers had done 17 reviews over the last year including assessments of the impact on clients of falls in the Indian rupee and the Indonesian rupiah.

There had also been a major review of Chinese port operations well before problems emerged with the existence of assets at the Chinese port of Qingdao. That review had found no direct impact on ANZ’s business and any indirect impact – of which there was no evidence – would be immaterial.

“Our approach helps us to get ahead of the curve, we do pro-active reviews,” Stolberg said. He added embedding risk disciplines in all sectors of the business was contributing to better credit loss performance.

“In IIB, we have a stronger quality book than the broader bank and our loss experience has been fantastic, exceptional. I don’t see anything happening over the next six to 12 months that will materially change. We are in a pretty benign credit environment.”

In another presentation, head of global markets and loans Steve Bellotti described how the growing diversification of ANZ’s markets business was both helping returns and lowering volatility.

Using what he described as a key metric, markets revenue per dollar of value at risk, Bellotti said that number had improved from $42 million per $1 million at risk to the high hundreds - $198 million in 2013 and $163 million in 2014.

Bellotti said some of that improvement came as post-financial market volatility eased but the bulk was the benefit of being in different geographies, different market segments with different clients.

“And OI (other income) is just as important, more important, as NI (net interest) in this market and it comes from capital markets, foreign exchange, rates and commodities. Diversification,” he said. “We will make more money on rates this year – and take less risk.”

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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