Improving outlook in institutional banking

As a bank with a single banking licence and a central brand, ANZ has just turned 50.

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But we have evolved and expanded over nearly 140 years – our first branch serviced the gold rush in Bendigo.

" As we emerge from this crisis and lending starts to free up, there is always a heightened risk. And that comes back to basic banking which we believe we have right now.”

And for that entire century and a half, ANZ has facilitated trade and money flows globally, particularly in the Asia Pacific region. That is in the DNA of ANZ and particularly our institutional banking business.

Today we look after multi-national companies across the 33 markets we are in and beyond. Our customers also include other financial institutions and we provide the platforms for them to undertake payments and foreign exchange. In fact we dominate trading in Aussie and Kiwi dollars in the region.

Over that time, and particularly the last few decades, we’ve seen the footprint in Asia expand and sometimes contract as we’ve responded to market and economic pressures. But essentially our business has always been trade and helping our customers, including increasingly smaller businesses, expand in the region.

Whether you look at the network we acquired with Grindlays in the 1980s or the expansion under Mike Smith earlier this century, while there was retail banking, the essence was trade and finance flows.

We’ve obviously rationalised, especially around retail banking where we didn’t have a competitive advantage, but we’ve built up the institutional business and the products and services we offer to SMEs.

Now that network and that customer base we believe is a competitive advantage. It differentiates us, from the other Australian banks in particular. Today, when you look at the global economy and particularly Asian economies starting to rebound after COVID-19, we are seeing that advantage come to the fore.

Initially, when the crisis hit, we effectively undertook a year’s worth of lending in one month – customers wanted security, they just wanted that money on hand, as a fallback. Now almost all that has reversed. Within a few months of the crisis starting, as governments and central banks reacted - and managed the economy really well in our view – liquidity came back into the system. Capital markets opened back up again. So people refinanced at very low rates.

Now I think we're entering a different phase. GDP growth is likely to continue across the world. China is looking at 9 per cent, the US 6, Australia 5. Other Asian countries should see even more growth even most European countries will expand.

We haven't seen that sort of synchronised alignment of global growth for a very, very, very long period of time. So there's going to be demand. It’s early but we’ve already started to see growth come through a little more recently.

If you look at M&A activity, IPO activity, we're looking at about 50 odd deals globally at the moment. We're not going to be involved in all of those but we can see the amount of activity that is occurring.

Some of these are well advanced, some are just ideas.  But bank funding will be involved in a lot of those (not all). Normally what you see is the banks would provide some good underlying core lending and then you will have some mezzanine finance, obviously some equity play. But there's no shortage of liquidity holding these deals back.

This is significant and if rates are kept as low as what we're hearing for an extended period, then you're going to continue to see this sort of activity. So I think over the next 12 to 18 months, there will be a lot more activity.

I think another sign of that health is the money flowing into investment funds and those investment funds are hiring and they will do transactions. So that all flows into the outlook for activity ahead.

Now what does that mean for banks? It’s positive but these are the periods when we need to see caution too. Because ANZ is in the top three in the region for debt, capital markets and syndicated loans, we have good transparency into the market.

With interest rates where they are and the liquidity around, the cost of capital has fallen. How long rates stay low is dependent on a number of factors, including the outlook for inflation.

Our expectation is that lending spreads, because of the amount of liquidity around and the desire for banks to compete and other entities, non-bank lenders, to compete, will stay down for a while. Base rates will stay lower. Money, for at least two or three years, will remain cheap.

So for banks, margins will remain competitive, and that's a good thing for the economy. Banks just have to manage their books on that basis and they should. What has happened in other cycles - and what we wouldn’t want to see - is when competition infects risk settings and we start to see covenant structures, security, eased off. That’s when you get trouble.

The other risk that always emerges, and we are seeing this play out already, is the danger of concentration. Whether it’s our own clients and regional exposures or those of our customer base, you must be aware of concentration risk.

From a pure banking perspective, one of the things we do - and more than we've ever done - is look to diversify our risk as far as we possibly can. We encourage our customer base to do that, whether it's in the supply chain or whether it's in their own customers that they're selling to. That is the best way to mitigate risk. If you’re reliant on one or two big customers or regions and there’s weakness there, that can put pressure on your whole company.

I’ve seen that many times in my career, going back to the Australian recession in the 90s with both Westpac and ANZ or the Asian crisis or the dot com bubble.

Unfortunately, over the years, ANZ’s Institutional bank has made some serious mistakes and we’ve had to work very hard with our investors to demonstrate, over a period, that we’ve learned from them so the business is given the value we believe it has.

As we emerge from this crisis and lending starts to free up, there is always a heightened risk. And that comes back to basic banking which we believe we have right now.

It’s those principles of, first of all, know your customer, basic KYC. Secondly, ensure you have the answers, you’ve asked all the right questions. With leverage comes risk, that’s obvious, so do you understand the leverage? Do you truly understand the underlying asset?

If you manage your leverage, you know your customer, you have diversification, you know your responsibilities, that’s the essence of a successful institutional bank. It’s the kind of bank ANZ is today.

Mark Whelan is Group Executive Institutional at ANZ

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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