ANZ Bank has delivered another record profit, promising shareholders a bigger dividend than expected on the back of cash earnings of A$6.49 billion.
But despite the bank’s continued Australian and international profit growth, analysts have started to criticise its super-regional strategy. This is hardly surprising.
Both NAB and Westpac were burnt after pushing strongly offshore, forced to retreat and leading to some cynicism about the likely success of ANZ’s push.
Nevertheless Australia has produced some successful multinationals over the last decade. CEO Mike Smith was recruited to make it happen for ANZ, and the company appears quite determined to succeed.
There are three sorts of strategies which have been tried by banks seeking faster growth in offshore markets. Some groups like Standard Chartered have a wide but shallow approach, with presence in lots of markets, and a focus on the flow of commerce (such as trade credit, credit cards etc), supported by a central treasury which raises funds across the group and then disperses them where they can be best used.
At the other extreme are banks like Santander, which has focussed on building banks with depth in a small number of countries, concentrating on developing strong local retail franchises, and businesses which are substantially self-funding.
A third group, like HSBC and Citi, have tried to be universal banks doing everything everywhere.
ANZ quite obviously set out to establish itself in the mould of Standard Chartered, with a wide franchise concentrating particularly on flow business, and moving funds to where they could be best used. This business model involves high set-up costs.
Having a single flow bank makes little sense: the value comes from creating a network capable of linking together the cross-border needs of regional businesses and mobile customers. And with the wide diversity of languages, cultures and regulations across Asia, the cost of building a cross-country network is greater in our region than it would be, for example, in Spanish-speaking America.
Given these factors, it is hardly surprising that analysts were able to point out ANZ would have made more money sooner if it had simply continued to invest in its Australian franchise.
The business model ANZ is pursuing is one with high establishment costs. As such it creates two significant risks. The most obvious is that the model has to produce the revenues which justify the costs.
The bank has to make loans to widely different businesses in different geographies and different industry sectors requiring good skills in understanding and pricing very different risks.
The second business risk is that it can be a very expensive model to undo. Since ANZ has had to buy franchises in much of the region, to undo the model it would have to go through country by country selling banks with the network value declining progressively through the process and with buyers aware that ANZ had to sell.
So the ANZ board has set out on a high stakes gamble.
If, as seems likely, the Asian economies can grow at 6% for many years while Australia grows at 3%, and ANZ becomes integrated into their business flows, the other Australian banks will find the ANZ returns hard to match.
NAB’s investment in the UK and the US may start to perform better over time but is never likely to match Asian growth rates; and CBA’s deeper but narrower investment in Indonesia and China provides a platform for growth but has progressed slowly.
Regulation is likely to make ANZ’s task harder. Since the financial crisis, regulators have made flow businesses more expensive to operate as part of a broad push to limit potential contagion between financial markets.
Interestingly ANZ now talks less about moving deposits between markets and more about raising local deposits where it does business. This seems a sensible adaptation but removes one of the basic justifications of the business model since funds cannot easily be moved to where they can be most profitably used.
ANZ’s latest results will tend to reinforce the criticisms, with the Australian and New Zealand businesses increasing profits sharply. At the same time the results will provide encouragement to the board with Asian revenues growing strongly, and the hope that this will eventually be translated into higher profits.