Banks have no case to answer: former ANZ CEO Mike Smith

Former ANZ chief executive Mike Smith says Australian politicians “have trashed” the banking industry.

Former ANZ chief executive Mike Smith dismisses the parliamentary grilling of big four CEOs as ‘a bit of theatre’. Picture: Aaron Francis

A relaxed Mike Smith, ever-faithful to the contrarian within, eases back in his chair and takes aim at this month’s parliamentary inquisition of the major bank chiefs.

Unconstrained by protocol for the house economic committee, which called for contrition and abject CEO apologies for past institutional sins, he distils the 12-hour interrogation of his former colleagues into eight words.

“No case to answer — a bit of theatre,” the former ANZ Bank boss says.

If only the theatre were so easy to dismiss.

Smith knows more than anyone that hostility towards banks is as old as time itself.

He traces it back to the moneylender Shylock in Shakespeare’s play The Merchant of Venice, first performed in 1605.

There’s an inevitable tension in the bank/customer relationship — banks manage your money. It’s not theirs. So what gives them the right to create a financial burden or cause trouble?

Then there’s the stuff-ups, of which ANZ has had its share, just like the others.

The $2.4 billion purchase of the Landmark rural loan book in 2009 was a mess, and some customers were treated badly.

But for Smith, the point is that Australia’s banks are massive institutions.

Stuff-ups inevitably happen but when they do they’re getting fixed, even though the remediation process can be tortuously long.

Heaven forbid, it’s not as though a succession of national governments over the last decade or so have covered themselves in glory, even though they were trying desperately hard to do the right thing at the time.

The relentless bank-bashing is a source of deep frustration to the ex-ANZ chief, and it’s been exacerbated in recent weeks by telephone calls he has taken from concerned colleagues abroad, including investors. “The international media has picked up (on the committee hearings) and I’ve had a couple of calls from the US asking if the banks are all right,” he says.

“This is another case where Australian politicians have ­trashed a successful industry — they’ve done it with mining, agriculture, medicine, education, and now it’s the banks.

“The politicians of Canada are incredibly supportive of their industries. But here, you have to wonder what’s going on. I really don’t get it.”

After eight years driving a super-regional strategy at ANZ that divided the market, Smith handed over to Shayne Elliott at the end of last year.

His severance package included six months’ gardening leave until July 7 and a 12-month, $250,000 consultancy agreement from July 11 to advise the board on international affairs.

Smith also agreed to a 12-month restraint from any involvement with a financial institution in Australia, New Zealand or Asia.

Last month, he inked an ambassadorial role with PricewaterhouseCoopers to support its Asian practice and advise clients on breaking into regional markets.

While there was talk of a trade ambassador’s role for the federal government, it’s yet to eventuate.

The British government approached him to take on a similar role but he knocked it back, saying he had settled in Australia and had no intention of relocating.

Smith spoke to The Weekend Australian after two recent client trips to China, the latter one following the shock arrest of 18 Crown employees involved in high-roller marketing activities on the mainland.

“I feel incredibly sorry for the people involved because they probably weren’t aware of what was going on (in the background),” he says.

“But we shouldn’t forget that China is not a democracy with a free press. Clearly something’s occurred that’s really annoyed the leadership.

“That’s the risk, if you like, of operating in that kind of system. It always has been.”

Smith believes Xi Jinping’s crackdown on corruption is necessary and the president’s way of adjusting the culture within the Communist Party.

The arrests and purges, he says, will continue for some time.

“The political fallout is that President Xi is now in a very strong position,” he says.

“He’ll probably replace three or four of his politburo members in the next change and that will really cement his power. He’ll have absolute power.

“But is the anti-corruption drive a bad thing for the average business? “I think not. Anyone who invests in another country is a visitor in that country. The best thing to be is a welcome visitor. And you work at that.”

As for the Chinese economy, Smith is cautiously optimistic.

There’s legitimate concern about the level of non-performing loans in the banking system, reportedly 15-20 per cent of total loans, while house prices are too high in the big cities and mortgage lending has grown too rapidly.

Smith notes that China demonstrated its willingness in the early 2000s to recapitalise the banks, and says it would do so again if necessary. In any event, most of the impaired loans are to state-owned enterprises, so any recapitalisation amounted to a money-go-round.

“They tend to top them up and then they’re performing, but we know there’s no way they can be repaid unless you have growth,” he says. “Growth is the answer to all of this.”

Smith reckons the transition in China from an investment-led to consumption-led economy is proceeding well, and the country will continue to grow at a tad under 7 per cent.

In fast-growing areas like Chongqing in western China, the growth rate could be as high as 11-12 per cent.

The US is a very different proposition, particularly if Donald Trump pulls off a miracle and wins the November 8 poll.

Smith has operated in most of the world’s big banking markets but has never had any dealings with the Republican presidential candidate.

“Trump was never considered a good risk,” he says wryly.

“But I can’t believe that any sane or rational person — and we presume that he is sane — could actually go through with some of the things he’s proposed.

“Maybe I’m being incredibly naive and optimistic, but the reality is we need a stable US at the moment because Europe is all over the place.

“One of the big problems with Brexit is that the UK provided Europe with some rational thinking and stability. That balance won’t be there without it.”

On Thursday, Smith’s successor hands down his first annual result. It will be closely examined for Elliott’s approach to the super-regional strategy.

Already, low-returning Asian assets are being run down in pursuit of higher group returns.

While some headlines suggest a retreat is under way, Smith sees it as a “quite understandable refocus” in the light of the heavy capital requirements imposed on banks since the crisis to run cross-border retail businesses.

Even five years ago, he says, that wasn’t the case, so ANZ has to “evolve and adjust”.

The capital discussion brings us back to the never-ending debate about the level of competitive intensity in Australian banking.

While politicians point to high industry ROEs, Smith says the requirement to hold more and more capital has fundamentally affected the profitability of banks and, in turn, their ROEs.

He makes the point that an investment in a bank is a leveraged play on the economy, with the leverage representing high risk.

High risk, however, demands a matching return, otherwise investors tend to walk away. “Investors aren’t stupid. That seems to have been lost in the argy-bargy.”