ANZ ‘ahead of schedule’ in Asia

ANZ Bank has revealed the targeted level of returns from its ­expansion into Asia.

ANZ’s Andrew Geczy predicts the bank’s Asian business will generate a double-digit ­return on equity over time

ANZ Bank has revealed the targeted level of returns from its ­expansion into Asia, as the focus shifts to leveraging profits from the investment after a six-year build-out that has divided the market.

Addressing the nation’s major funds management houses and broking analysts in Hong Kong yesterday, Andrew Geczy, the head of the bank’s international and institutional banking unit, said Asia was delivering returns about its cost of capital and was tracking two years ahead of schedule.

The IIB unit drives ANZ’s super regional strategy to grow earnings from the Asia-Pacific, Europe and America to 25-30 per cent of the group by 2017, up from 20 per cent. Asia accounted for 36 per cent of IIB’s $1.4 billion of profit in the first half.

“We are very close to that goal already,” said Mr Geczy, referring to the 25-30 per cent target.

When pushed on returns after years of criticism from analysts amid juicier profits in Australia, he said that the Asian business — heavily weighted to institutional banking rather than retail — would generate a double-digit ­return on equity over time.

“Where do we see ROEs for a business like this to be, an institutional business? I think a through-the-cycle kind of number is about 13 per cent,” Mr Geczy said.

Commonwealth Bank improved its ROE to 18.7 per cent in the first half. ANZ has pledged to increase its group ROE to 16 per cent by 2016, up from 15.5 per cent, which several analysts have questioned given incoming stricter rules forcing the banks to raise capital levels.

Much of day one of ANZ’s biannual Asia tour pressed that the Asian business was built and ­focused on delivery.

Credit Suisse analyst Jarrod Martin welcomed ANZ’s ­“sharper” focus, but labelled the 13 per cent ROE aspiration “quite modest in the context of both ANZ and Australian banks”.

“Investors are likely to require evidence of over-delivery before seeing the strategy as a compelling investment proposition,” Mr Martin told The Australian.

Mr Geczy, who was brought in by group chief Mike Smith last year after the departure of Alex Thursby, conceded that conditions would be “challenging” in coming years, singling out rising regulatory costs and pressure on margins from excess liquidity in markets.

But he argued major competitors in the region Standard Chartered, Citi and HSBC were “vulnerable” as they were distracted by global regulation changes, while rivals in Australia may be too late to tap Asia’s growth due to rising entry costs.

“The established competitors are focused on problems in other parts of the globe, which means they don’t have the resources to invest, and the emerging Asian competitors are doing it probably a few years too late as they try to build out their business,” Mr Geczy said. “We’ve already built the footprint, we’ve made that investment. It’s about getting a return on that investment now.”

Steve Bellotti, IIB’s head of global markets and loans, added that the tailwind to ANZ as European banks withdrew from Asia should not be underestimated.

After 10 months at the bank, Mr Geczy said he sharpened the strategy to adapt to the changing conditions, citing growing ­­­cross- border and multi-product ­relationships with the likes of Smiggle, Jardine Matheson, Colgate Palmolive and Heineken.

He spruiked the declining reliance on net interest income, with other operating income accounting for 45 per cent of IIB’s revenue, and assured people that ANZ was not going up the risk curve. ANZ’s large corporate customers have expanded from 1800 to 4000 since 2009.

“I’m only focused on the Asia-Pacific financial services wallet, so I’m not trying to compete with Citi in the UK, in Europe,” he said.

IIB chief risk officer Doug Stol­berg said ANZ had deliberately focused on building assets providing short-term trade ­finance, citing how banks historically failed upon liquidity problems. He said the “benign” credit environment of recent years would continue, suggesting the banks’ bad-debt charges would stay low. He said the Australian Prudential Regulation Authority was engaged with the bank about its expansion into Asia. It was “comfortable” with its progress.