Strategy, sharper delivery drive positive ANZ outlook in Asia

Looking out on Hong Kong harbour as I prepare to update investors on ANZ’s business in Asia, it’s very clear that this region remains the place to be.

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The macro-economic drivers here are my friend and they’re the friend of ANZ’s investors. 

The scene in front of me on the harbour provides an incredibly strong visual reminder that trade in Asia is forecast to grow nearly twice as fast as the rest of world as the economic centre of gravity shifts irreversibly to Asia. 

By 2020 six of the top 10 trading nations will be Asian and most Asian trade growth will be driven by emerging Asia and intra-Asia trade.

For ANZ and for our investors, I believe it is the trade and investment flows that matter more than any individual country’s GDP as they provide major opportunities for our business. For example, Asia’s banking pools will remain the fastest growing pools, outpacing the rest of world by two to one. 

Our home markets of Australia and New Zealand are also a key part of the International and Institutional Banking Division and they also benefiting from this increase in Asia trade and capital flows. Essentially we have been able to follow our customers and trade and investment flows into Asia and from Asia because we have the necessary infrastructure in place. 

So having joined ANZ almost 10 months ago, it’s clear after meeting hundreds of staff and customers that ANZ’s growth strategy based on strong home markets and profitable Asian growth delivered via an enterprise approach does not need any major shifts. 

In the International and Institutional Banking business that I lead, which is the major driver in delivering the Asia Pacific element of ANZ’s super regional strategy, it was really the delivery of strategy that I could see needed sharpening. 

ANZ has made huge progress in the past six years.  

We have built strong customer and regulatory relationships and expanded our geographic footprint.  That has seen us move to a Top 4 Corporate Bank in Asia, up from our twelfth position in 2009 and today we are selling more products to more customers in more geographies than ever before. 

The inevitable consequence of this build-up phase in Asia however, was that we needed to address some structural elements that were getting in the way of our ability to deliver our strategy. 

Late last year, we began an organisational re-structure that would enable us to address this.

We removed the historical geographical approach that had come to impede our decision-making and delivery to customers, and implemented a global approach to our customers and products. 

We introduced two new functions to help us to better harness and use our intellectual capital for customers and to help us deploy our financial capital more efficiently. 

Finally we put in place a series of project groups to address a number of pain points that were impeding our ability to deliver to customers.  Those groups have enabled us to reduce our structural complexity, get us closer to the customer, allocate resources more efficiently and to consolidate what we measure and how we measure it to improve our customer focus. 

These projects have been important first-step in reinvigorating the delivery of our strategy and in striking a better balance between investments we need to make to realize the opportunity in Asia over the medium term and the disciplines we need to deliver improved returns to ANZ’s shareholders. 

The scorecard for International and Institutional Banking that I’m sharing with investors this week is showing good progress.

  1. We have market strength, with significant share in home markets.
    We have increased the number of our large corporate customers from 1,800 to 4,000 since 2009 and we have deepened our country presence with seven out of 13 countries in Asia now making more than $100 million in revenue. 
    The breadth of our products has also allowed us to grow in tough, competitive markets. We have been consistent where many peers have been in and out of the market and consistency really counts with customers.

  2. We have built a super-regional bank in Asia which today is earning above its cost of capital.
    Asia is continuing to grow strongly as a proportion of Divisional NPAT even during the past year, accounting for 36% of earnings at the 2014 half-year and we are driving improved Divisional return on equity.

  3. We have not gone up the risk curve.
    Despite our growth in Asia we have maintained a self-funded, highly liquid, low-risk balance sheet with room for strong asset growth. Our customer base in the region are predominantly multinationals and regional companies and so the credit quality of our Asia book is as good or better than Australia with lower levels of default. 

Looking ahead, one of my messages to investors this week will be that banking conditions are going to be challenging in the near-term. Regulatory costs have increased in all markets and the current excess liquidity globally has compressed spreads. 

Although competition in Asia is fierce, global banks are increasingly distracted by regulatory issues and regional banks are facing rising entry costs as they seek to expand into new markets. 

So to continue our growth in revenue and in returns, and to capitalise on our position as what I think of as the most international Australian bank and the most Australian international bank, a few important modifications to our approach are imperative. 

  • Connecting more customers in key regional trade and investment corridors.
    For example, we are making a key shift in the mindset that drives our approach in relation to determining market share.  We are no longer thinking only about market share as the share of this market or that market, but rather we are thinking about the market share – or the financial services wallet – of the corridors  that exist between markets.  
    Using iron-ore as an example, we know how much is being shipped out of Australia, where it is going, and the rough value. We can therefore calculate our share of the trade finance, and FX and therefore what portion of trade flows we manage. 
  • Providing seamless value through leading products, delivered through a scalable and an optimised operating platform. 
    For example, by scaling and optimising infrastructure, we can lower unit cost to help reduce operational losses and enable better pricing and service levels. 
  • Continuing to driving improved Divisional ROE through intensified balance sheet management.
    Essentially this means deploying risk weighted assets more effectively and increasing relationship returns. And we will not compromise our credit quality to get there. 

So today, International and Institutional Banking is a profitable growth business producing returns above the cost of capital. 

The result is that we are very close to delivering the ANZ Group goal for earnings derived from Asia Pacific Europe and America to contribute 25-30% of total earnings by 2017. Looking forward our priorities will drive better return for the division and allow IIB to contribute more strongly to Group financial objectives. 

As we continue to grow and diversify our business, my key message is that we will be in a position to deliver even better outcomes for our customers and for our shareholders. 

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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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