ANZ broadens horizons – but with the right assets?

Euromoney, September 2009

The track record of Australian financial services groups expanding overseas is patchy at best: AMP and National Australia Bank are among the pioneers who have lost their when acquiring outside Australia. The latest to try its hand is ANZ, which in August took a big step towards its ambition to become what CEO Mike Smith calls a “super regional bank” by buying US$550 million-worth of RBS businesses in Asia.

Unlike other Australian banks, which have tended to focus on the US and Europe, ANZ’s strategy is all about Asia. Smith says he has “a firmly held belief that Asia will continue to grow as the engine room of the world economy. Given that outlook there is a compelling rationale for any financial services company with long term aspirations to give its shareholders exposure to the Asian growth story.”

ANZ is already the leading foreign bank in some frontier markets like Cambodia, Papua New Guinea and East Timor, among the leaders (and locally incorporated) in Vietnam, and strong in Indonesia, where it is majority owner of ANZ Panin. It has significant hubs in Hong Kong and Singapore, owns stakes in Shanghai Rural Commercial Bank and Bank of Tianjin in China, and has offices in most major Asian countries. Including a big Bangalore back office it had about 5,500 staff in the region before the acquisition.

The August acquisitions bring that number to 8,000 and bring in businesses in six countries. The biggest is in Taiwan, where ANZ gains RBS’s retail, wealth, commercial and institutional businesses, covering 21 branches, 1.3 million customers and US$2.7 billion of deposits. Other businesses including retail, wealth and commercial lines in Hong Kong, Singapore and Indonesia, and institutional businesses in Vietnam and the Philippines. All told the deal brings in US$3.2 billion in loans and US$7.1 billion in deposits serving a client base of about 2 million people, and has been done at 1.1 times the fully provided net tangible book value. It is, Smith says, “a meaningful boost for our Asian businesses… not a transformational acquisition, but a stepping stone that bulks us up.”

But perhaps what’s more interesting is what ANZ didn’t acquire: RBS’s assets in China and India. Why not? “Essentially we have a very significant well-developed growth plan in China which is well on track,” Smith says. “Compared to this we felt the premium being sought by RBS would have been difficult to convert to true value.”

This argument seems to stack up: ANZ has been established on the mainland in 1986, has branches in key cities, is in the process of getting local incorporation and is happy with the roughly 20% stakes in its two local banks (and the fact that it already had those two stakes may have made further acquisition tricky with regulators anyway). If RBS was asking big money for its China franchise ANZ would have had good reason to stay away.

But what of India? The former ABN Amro operations that were on sale here are well-regarded. ANZ has hardly anything in the country beyond its back office and a trade finance capability: no overlap. Smith says: “I’d love to be bigger in India. We are waiting for the bank licence approval and we just have to be realistic. We have to be able to walk before we can run, we have to do it at bite size.” He adds that India is “the missing piece in the jigsaw.”

This explanation is harder to follow. For a bank with super-regional hopes, what better time to take on a big business in India? What sort of ambition is shown by a confession that the bank could not digest such an asset? It’s unlikely that cost was the reason: ANZ funded the acquisition out of recent institutional and retail share placements, and still has a tier one capital ratio of 9.5% – plus, it would have no problem raising debt funding as it is still covered by Australia’s government guarantee.

It’s doubly odd since India is arguably the market with which ANZ has the closest historical connection, through the Grindlays franchise it bought in 1984, turning it into the biggest foreign bank in India before selling it to Standard Chartered in 2000. One possibility is that, without its own banking licence, ANZ would not have been permitted to take on the assets. But Indian press have reported the Reserve Bank of India had given an informal nod to ANZ to buy the businesses.

This omission has tempered the response from Australian bank analysts. “The premier assets RBS was selling were in China and India. What they’ve done is picked up the other stuff,” says Brian Johnson at CLSA, who thinks ANZ may be impeded in its licence negotiations because of a dispute with India’s National Housing Bank that simmered for a decade before being resolved in India’s Supreme Court in 2006. He adds: “In ANZ I see a bank that’s number four in the banking system… Asia is structurally exciting but ANZ needs to bulk up in Australia and that should be the priority.”

Smith is unlikely to be swayed. Asia now contributes around 10% of group underlying profit and he wants it to get to 20% using these assets. “At some stage we will have to move to a transformational deal, but I think that is some way ahead,” he says. “Our vision of being a super-regional bank makes even more sense today than it did when I articulated it in December 2007.”