How Australia’s banks missed out on becoming a global finance centre

CBA replaced Westpac as Australia’s largest and most profitable bank. Picture: NCA NewsWire / James Gourley

When the Western Pacific Banking Corporation — now known as Westpac — this week sold the last of its “Pacific” assets it was the official end to an era when visionary Australian bank executives and boards believed their talents had few global peers. And they wanted to prove it by taking on the world.

Australian banks bought beachheads in Asia, the UK and even the US and it looked like we would become a base for international banking, with the combination of Melbourne and Sydney becoming a regional finance centre. On the surface each of the plunges failed but in each case second thoughts plagued the bank boards, along with dramas at home. We never went beyond those beachheads. BHP Steel (now BlueScope) had a similar vision and, thanks to the determination of the remarkable Ron McNeilly, it did not give in when faced with adversity and eventually won through.

In Australian banking today global visions have disappeared but a new set of Australian global visionaries is emerging, usually based on technology. The story of what happened to the Western Pacific Banking Corporation and the 1980s banking visionaries is a lesson for all those seeking to again take on the world.

In 1982 Australia’s largest bank was the Bank of New South Wales. It wanted a bigger market share in Victoria and acquired the innovative and entrepreneurial Commercial Bank of Australia (CBA). ANZ also desperately wanted to buy CBA, so the Bank of NSW not only paid top dollar but agreed that Australia’s best banking brand — the Bank of NSW — would be changed to the Western Pacific Banking Corporation, or Westpac. The company would take on a regional role, partly driven by the CBA people who saw the opportunity created by what they thought was to be a genuine “merger”.

Around the same time the National Bank wanted a bigger presence in Sydney and purchased the Commercial Banking Company of Sydney. Whereas the global visionaries at Westpac were looking at the Pacific, those at the merged National Australia Bank purchased a beachhead in the UK. Soon after, the ANZ, feeling jilted at losing the CBA bank, took the most aggressive international stance of all the banks and bought the Grindlays’ Indian, Pakistan and Asian empire and substantially expanded its international network.

As often happens to global visionaries, dramatic events back home cause international aims to be set aside.

In Australia the local game changed because treasurer Paul Keating announced he would be inviting overseas banks to come to Australia to compete with the locals. ANZ, having missed out on local acquisitions, undertook aggressive lending to gain local market share ahead of the overseas invasion. Westpac wanted to retain its leading position and took a similar stance.

NAB under Nobby Clark and Don Argus was more cautious. The Commonwealth, under the late Don Sanders, also did not join in the race for market share. The overseas banks began arriving in 1986 and 1987 and suddenly Australia hit Paul Keating’s “recession we had to have”. Bank lending interest rates rose to around 17 per cent. Westpac and ANZ, as the two recent aggressors, suddenly were hit by an avalanche of bad debts and both went close hitting the wall.

What happened in that 1987-90 recession set the scene for Australian banking in the 21st century.

None of the overseas banks that came to Australia became a major force. Westpac avoided being controlled by Kerry Packer but was shaken by the experience and the dream of the Western Pacific Banking Corporation was pursued in token only.

ANZ held onto its Asian assets in the crisis but did not take the required second step to become a major force in the region.

The Reserve Bank began to modify the capital rules to make it harder for Australian banks to be global. Around 2000, with John McFarlane as CEO, ANZ sold Grindlays. When McFarlane retired from the ANZ he was replaced by an Asian banker, Mike Smith, with the task of restoring the great ANZ global vision. But it was a time when big profits were being made in home lending and any purchase in Asia was expensive and would result in lower returns in the short term. There were several opportunities but they were never executed and the vision died when Smith retired.

At NAB during the late 1980s and early 1990s, Don Argus saw ANZ and Westpac contracting dramatically and grabbed the opportunity to take their best business clients. NAB became the largest business banker in Australia. But that concentration on the local market meant that opportunities to go to the next stage in the UK were not taken. Moreover, when Argus retired as CEO, NAB purchased MLC in Australia and tried to buy AMP.

Later it tried to restore overseas momentum, which included purchasing a small agricultural bank in the US, but the global financial crisis triggered losses. NAB floated its UK assets and sold the US bank.

The Commonwealth Bank did not participate in the 1980s market share race. The State Savings Bank of Victoria, which had been very aggressive in the 1980s, faced collapse. Keating engineered a deal whereby the Commonwealth would buy Victoria’s state bank for a song. That takeover, plus some astute management, enabled the Commonwealth Bank to replace Westpac as Australia’s largest and most profitable bank.

All the banks in Australia became profit power houses and distributed most of their money via franked dividends. The money that would have been used to expand the overseas networks came to shareholders via dividends. Shareholders would regard themselves as the beneficiaries but Australia missed out on being a global banking centre.

Paradoxically, John McFarlane, who at the ANZ sold Grindlays, was chairman of Westpac when it sold its Pacific assets and formally ended the vision of the 1980s.