ANZ is refining not ditching its Asia strategy

Former ANZ chief executive Mike Smith helps open the bank's first rural branch in Chongqing, China. The current CEO says that recent moves are “absolutely not about getting out of Asia.”

In discussing ANZ Bank’s third quarter trading its chief executive, Shayne Elliott, has subtly addressed the recent assertions that the bank is retreating from a failed Asian strategy. The significant shifts occurring in the region are more tactical than strategic.

Elliott himself refers to the “big shift” within ANZ’s balance sheet, with a $15 billion reduction in risk-weighted assets over the nine months to June, as a shift of balance.

“It’s absolutely not about getting out of Asia,” he said.

“There’s going to be a little bit of RWA (risk-weighted asset) or balance sheet shrinkage in Asia at the moment. A lot of that is to do with the fact that commodity prices are down and therefore the value of what we are financing has come down naturally.”

The steady reduction in ANZ’s risk-weighted asset base, essentially about $5bn a quarter, is targeted at lower-yielding assets. Revenue within its institutional bank, which houses the bulk of the assets being focused on, fell by a lesser percentage than the reduction in the asset base and (excluding global markets margins) the division’s margins improved five basis points.

In the current climate, with pressure on bank margins at home and increased volatility and risk within Asia as China struggles to sustain its growth rate and while there is an increased focus on the risk inherent in the mountain of US dollar-denominated debt within the region, it makes perfect sense for ANZ to shed its lower-margin and higher-risk exposures in Asia.

Refining the Asian strategy and consolidating around a less volatile and risky core is a sensible evolution in the strategy ANZ has pursued for much of the past decade — and for which former CEO Mike Smith continues to be criticised.

It makes even more sense when returns on capital are under acute pressure from the increasing levels of regulatory capital the major banks are being required to hold.

Elliott has won surprising plaudits for the big changes — the significant shrinkage in the group’s asset base — he has been presiding over even though the new conservatism within ANZ has resulted in reduced dividends.

The positioning is, however, appropriate to the times. ANZ’s cash earnings for the nine months to 30 June were down 3 per cent to $5.2bn as bad debts edge up, the institutional business contracts and the domestic retail and commercial banking businesses experience modest asset growth and margin pressures in a very competitive low-growth environment.

All the banks are focusing on how efficiently their capital can be deployed and on cost management in an environment where there is only modest volume growth because of relatively weak demand for credit and regulator-inspired crackdowns on investment property lending and on loans to foreign investors in property.

As Elliott said, in an interview with ANZ’s in-house “newsroom”, the restructuring of the group’s balance sheet and cost base is based on a conviction that the outlook is for a lower-growth environment for many years to come. That places an acute focus on productivity and the efficiency with which capital is deployed.

It isn’t only the low-growth external environment that the banks are confronting. Regulatory changes — big increases in regulatory capital levels and the looming net stable funding requirements with their emphasis on retail deposits and long term wholesale funding — are creating their own pressures.

All the banks are struggling to explain the implications of the regulatory changes within a low-rate environment to their customers and the public at large, including politicians.

Elliott referred to “a rather complex formula that we need to solve” and made the point, when asked about the decision not to pass on the full 25 basis point reduction in the cash rate last week, that ANZ had five times as many depositors as it did borrowers.

“We need to get that balance right because without those really valuable deposits we don’t have any money to lend.

“I mean, we are essentially an intermediary and we need to get that balance right and we need to be competitive with depositors to make sure they keep their money in the bank and don’t take it out into other investments.

“The RBA cash rate is an important ingredient when we look at that formula and think about what the right number is on both sides, but it’s certainly not the only ingredient.”

Bendigo and Adelaide Bank CEO Mike Hirst made similar comments on Monday and Commonwealth Bank CEO Ian Narev can also be expected to make the case for sharing the impacts of RBA rate movements between borrowers, depositors and shareholders — while satisfying regulators — when his bank reports for the June year tomorrow.

It’s actually not that difficult an argument to mount, except that politicians and others whose reflex is to bash banks are obsessed with only one input into the “formula” bank executives have to work through — mortgage rates — even though they are already at multi-decade lows.