Euromoney: ANZ shoots straight for Asia

Euromoney, April 2010

When Euromoney meets Alex Thursby, ANZ’s chief executive for Asia Pacific, Europe and America, the interview doesn’t take place in the bank’s Singapore office on Raffles Place but in a boardroom at local conglomerate Fraser & Neave. The boardroom is next door to the office of F&N chairman Lee Hsien Yang, who besides his chairmanship is the brother of prime minister Lee Hsein Loong, son of Singapore’s elder statesman Lee Kuan Yew – and, since February 2009, an ANZ director.

ANZ is giving us a message with its choice of interview location: that it is connected in Asia, committed, and a presence to be taken seriously. It’s a message that has been hammered home repeatedly for two and a half years since Mike Smith, a former HSBC executive, followed his appointment as ANZ CEO by unveiling a punchy and highly specific ambition to become what he calls a “super regional bank”, deriving 20% of its earnings from the Asia Pacific region by 2012 (it was 7% in 2007). Since that day, everything that ANZ has done – its appointments, the people it poaches from, its acquisitions, its choice of board representatives – has reflected that international and chiefly Asian goal. Even domestic activity is couched in Asian terms: when ANZ acquired a A$2.4 billion agribusiness loan book from AWB in December, an entirely domestic portfolio full of Queensland crop and beef farmers, Smith’s four sentences of formal comment in the announcement still managed to squeeze in a reference to synergies with Western China.

At a time when others have retrenched and reshaped, ANZ stands out for the brassiness of its ambition. Smith and Thursby are plain-speaking and strident. “We’re noisy people,” says Thursby. Smith speaks of a no-nonsense style of top management. “It’s very focused, it’s high energy, it’s fairly aggressive,” he says. “We’re certainly a straight-shooting bunch of people.”

ANZ’s straight-shooting is particularly striking since Australian institutions have not tended to expand overseas with such explicitly stated purpose – and when they have, it’s often gone badly. Australian institutional investors, who are a powerful force in a country with a more than US$1 trillion superannuation (pension) industry, are not in a rush to see their domestic champions dilute their earnings with speculative long-term growth strategies elsewhere in the world.

“Initially I got a fair amount of cold water poured on me,” says Smith of his initial super-regional announcement back in 2007. “Traditionally Australian investors saw the opportunity in the domestic market as being sufficient and there is a perception – I think a false perception – that Australian companies who operate outside Australia don’t do very well. Banks have tended to be very submissive to market sentiment.”

Smith is talking high above Melbourne’s Queen Street in the city where much of this institutional muscle resides. But for him, there’s no question where the opportunity is. A 29-year career at HSBC culminated with him becoming president and CEO of The Hongkong and Shanghai Banking Corporation Limited, which effectively means the head of Asia, as well as chairman of Hang Seng Bank and the head of commercial banking for the group globally. While by no means unfamiliar with Australia – he spent five years working there and two of his three children were born in Melbourne – he has been a globetrotter in the time-honoured HSBC style, managing everywhere from the UK, Argentina and Malaysia to Oman and the Solomon Islands. When ANZ appointed him CEO in June 2007, starting formally that October, they knew exactly what he would want to do. Thursby’s appointment, announced three days after Smith’s, underlined the ambition: another Brit (albeit partly schooled in Australia), Thursby had spent 21 years in senior wholesale banking roles at Standard Chartered, most recently in Singapore.

It’s not as if ANZ was unfamiliar with Asia before their arrival. Before either man stepped on board ANZ held 19.1% of Malaysia’s AMMB, 20% of Bank of Tianjin, 19.8% of Shanghai Rural Commercial Bank, 29% of Indonesia’s Panin Bank (now 38% plus an 85% stake of a subsidiary, PT ANZ Panin), had thousands of back office staff based in Bangalore and was probably the leading foreign bank in Indochina. But no predecessor had been quite so strident as Smith when, just two months into the job, he used the forum of ANZ’s December 2007 annual general meeting in Perth to outline the ambition to get 20% of group business from Asia within five years.

His announcement came just as the world was slipping into the financial crisis, and in that respect ANZ was well-placed. Firstly, Australian banks weathered the storm exceptionally well compared to their counterparts elsewhere in the world; secondly, it meant people and assets started to come up for grabs. ANZ has 5,500 people in Asia through organic growth; Thursby reckons 60-70% of them have been brought in in the last two years, by far the most aggressive hiring in the region through that period. On top of that, the acquisition of RBS’s assets in six Asian countries for $550 million, announced in August, brings the number to around 8,000. Are they still hiring? “Yeah yeah yeah,” says Thursby with enthusiasm. “I think we’ll be 10,000 people in Asia by the end of next year.”

While hiring on this scale can look scattershot, ANZ is actually quite clear on what it does and doesn’t want to be in Asia. It sets out three types of geographical approach. There are franchise builds, where ANZ wants to make large sustainable businesses: Indonesia, the Greater Mekong led by Vietnam, Malaysia through the AmBank partnership, Greater China, and India. Each of these will have an institutional, commercial and retail and wealth business. Hong Kong and Singapore will host institutional and private banking businesses with a modest retail wealth operation aimed at the top end, but will also act as financial hubs. A third tier of countries aims only for the institutional business – “the top 100, 120 clients in those countries,” Thursby says – including the Philippines, Korea and Japan.

In terms of business lines, ANZ puts commercial and institutional together within a wholesale business built around rates, FX, cash management, trade and debt capital markets. Don’t expect to see ANZ turning into a broker in Asia, though: its only involvement with equities is in a derivatives business. “We’re not into broking, underwriting and so on,” says Thursby, who also says he won’t be into alternative assets, private equity, or M&A except where it helps existing customers.

Smith is big on knowing what not to be in as well as what to be in. “We don’t pretend to be a Wall Street investment bank and some of the businesses I inherited were trying to be,” says Smith. “If you play in the first division with a third division team the outcome is pretty inevitable.”

ANZ has been an active institutional presence in Asia for some time. But the most daunting area of what ANZ proposes is that it wants to build a retail and wealth business. Thursby describes himself as “a great believer in having a 50/50 business” in terms of the institutional/retail split.

This is a tough call – one could argue Standard Chartered still hasn’t nailed it after about a century – and Smith knows it. “We can’t do it fast. You can set up an institutional bank in six months, you put the people in and you’re there, but actually creating a deposit base is hard. I understand it won’t be a big business for a long time but it will be important, because that funding is going to be critical for the whole group.”

Thursby is keen to stress that this won’t be a retail bank competing on the ground for all deposits. “We have no capacity to enter the mass market,” he says. “I believe there’s only one international bank who can do it, and that’s HSBC.” Instead, in most markets he intends to focus on the top 3 or 4% of local individual wealth, with branches concentrated in the cities with the right demographic. In Indonesia, for example, “85% of the people we want are in four cities so let’s go and target those first.” It will be a business built around deposits and wealth management products (with an emphasis on distribution rather than manufacturing), with a niche standing in mortgages and a decent credit card business. “And, while I won’t be held to this day in day out, the trend will be two to one deposits to assets – three to one when you include funds under management. That’s a huge difference from the shape of an Australian bank which is predominantly mortgages, credit cards, and deposits are a lot less.”

If the model sounds familiar, it probably most resembles Standard Chartered: an unsexy but powerful wholesale business with a strong consumer element as well. Thursby agrees to a point but thinks ANZ resembles “the old Stanchart – they’ve moved into more of an investment banking model, whereas we are the wholesale model they used to be.” Certainly new hires have focused very much on Standard Chartered and HSBC (“and don’t forget Citi,” Thursby says): in the last two years general manager of Asia Pacific strategy Nancy Wong, China CEO Christine Ip and Korea CEO Heung-Je Kim have all crossed over from Stanchart, while chief risk officer for Asia Michael Denby is one of many HSBC alumni. “We have our own model and we are unique but there are parts of it that have a similarity,” says Thursby. “But we don’t have 150 years of incumbency. I’m like a new kid on the block with a technology company.”

While ANZ has been hiring on all fronts ever since Smith explained his vision in late 2007, it was the RBS deal that really demonstrated to the market how serious ANZ was about gaining scale. “It gave us a credibility in the region,” Smith says. “It said: these guys do mean business.”

The RBS deal brought in a range of business. The biggest was in Taiwan, where ANZ took on the retail, wealth, commercial and institutional businesses, covering 21 branches, 1.3 million customers and US$2.7 billion of deposits. The deal also covered retail, wealth and commercial lines in Hong Kong, Singapore and Indonesia, and institutional businesses in Vietnam and the Philippines; a total of US$3.2 billion of loans and US$7.1 billion of deposits (and this is key: as Smith says, “what I’ve loved about the RBS deal is that RBS sold us their funding base. That’s the hard thing to create”). It brings a client base of about two million people, at a price equivalent to 1.1 times book.

For Thursby, there were many advantages to the deal: it brought assets in countries where ANZ wanted to build; it was a declaration of intent; it was cheap; and it brought balance to his business by boosting that hard-to-build retail side. “I needed to get a kicker,” he says.

That said, one of the most interesting things about the deal was what it didn’t include. RBS’s China and India assets were on the block too, but ANZ bid for neither. CLSA analyst Brian Johnson told Euromoney at the time: “The premier assets RBS was selling were in China and India. What they’ve done is picked up the other stuff.”

Why? The explanation in China made sense: the assets were expensive and ANZ has plans underway. “At the prices they wanted there was no way we were going to buy China, and we can do it organically anyway,” Thursby says. ANZ has the two stakes in local banks, in which it would happily increase ownership if permitted; has 100% ownership of a rural bank it launched in Chongqing province last year, which while small is politically useful and sews the seeds for deposit-taking; and hopes to gain local incorporation for its own five-branch operation this year. Smith himself has the connections in China one would expect given his previous employer; he is a member of advisory councils for the mayors of Chongqing and Shanghai. Granted, ANZ’s 270 China staff at the time of the RBS deal were less than half the 580 it has in Vietnam, but there’s a plan and a presence there.

But what of India? For a bank with super-regional ambitions it seemed odd to steer clear of the Indian assets for the reason given at the time of the announcement – that it would be “a bridge too far”, “biting off more than we could chew.”

Eight months on, the two men differ notably in their explanations. Thursby focuses on the quality of the asset itself, and the ability to integrate with the small team ANZ has on the ground there (notwithstanding its Bangalore back office presence). ANZ at the time of the interview did not have an Indian banking licence, having sold its Grindlays franchise in the country to Standard Chartered in 2000. When asked if ANZ could have bought the assets even if it wanted to, Thursby says: “I wouldn’t have bought the Indian assets full stop at the prices they wanted. The business was caught between being a mass market business and an up-market business. It was a difficult sale, with some branches staying and some branches not; they had had a fallout generally in the consumer books; so I wasn’t interested.

“Also, could I integrate it? Did I have the people? If it was a perfect business I would have thought differently but it was a big ask for us to do it with no capacity. Mike and I both said we wanted to get a beachhead before taking on the market full frontal.” In Thursby’s account, the history with the Grindlays sale, and a long-standing dispute with India’s National Housing Bank that took a decade to resolve before being settled in India’s Supreme Court in 2006, were not really significant. “I don’t think it’s been a bugbear.”

By the time Euromoney met Smith in Melbourne 10 days later, the Indian banking licence had been pre-approved. Whether for this reason or others, Smith’s account is quite different. After emphasizing the need to behave sensibly and respectfully in India – “to be back is very important and we have to respect that we are a guest in India, to be cognizant of their feelings and to go at the pace they would like us to” – the exchange went like this:

“Euromoney: You must wish your predecessors hadn’t sold Grindlays.

Smith: Yes. In a word. Though the sale was loved by the market, I might add.

Did having exited complicate getting back in?

Yes. And quite understandably. For an organization to come in and out of a country is not ideal. Banking is about long-termism. You can’t go in and out and just expect people to understand because it’s commercially expedient. The commitment has to be greater than that.

If you had had the licence at the time would you have been more likely to acquire the RBS assets?

I would certainly have been in a position to have had a go, yes.

But you couldn’t without the licence?

I felt it would have been absolutely inappropriate to have made an offer without having a licence first. I think that would have been incredibly arrogant of us. I don’t think the Indian authorities would have perceived it very favourably.

Those assets are still out there, aren’t they? Could you still acquire?

Never say never. But right now we’ve got quite a lot on our plate. I would like to get to first base and then we may be able to have a look.”

Either way, India remains the missing piece of the jigsaw and an area where activity should be expected.

Is another major acquisition in the works? The bank is exceptionally well-capitalized with an adequacy ratio over 10%: even allowing for some fairly draconian changes in regulatory capital requirements, Johnson reckons “they can spend A$2.5 billion on just funding goodwill on an acquisition. There’s a sizeable warchest there.” Smith says: “We’ve got a lot of firepower, a lot of powder that’s dry.”

But analysts wonder if any of the good financial crisis opportunities are still around. “ANZ has got a capital level commensurate with a sizable acquisition, and that’s important to them; but the banking assets in Asia that are still on the market are becoming more expensively priced,” says Stewart Oldfield at EL&C Baillieu Stockbroking. “RBS was a good deal but was not the knockout blow some folk were anticipating in terms of size.”

Additionally, the speed and vigour of hiring has some people worried that the quality ANZ is bringing in is not universally high. Privately, executives at the banks who have borne the brunt of ANZ’s poaching say that the bank has made some good hires but also brought in plenty of dead wood. “They’ve hired a number of people. I’m not sure they’ve necessarily hired people of a stature that will really kick start their business,” says one, referring in particular to capital markets.

Picking up unwanted assets also presents an integration risk since the people within are not generally in the best frame of mind. Consider the Taiwan acquisition: four years ago most of its staff were working for Taitung Business Bank, which then failed, was sold in an auction to ABN Amro, passed on to RBS as a result of that merger, before being shifted on to ANZ. How will morale be there?

Smith acknowledges: “There’s always a risk. And a few will not be right, another few will fall by the wayside and ANZ won’t be right for them. But by and large the thing that has attracted people is that we’ve got a growth story here, a clear vision and agenda. And people want to be part of that.”

Thursby spells out the attraction. “We’re not looking at mid-tier,” he says. “We’re looking at the top three and saying: that is who we’ve got to challenge and survive against.”

BOX: NEGLECTING HOME

One of the biggest concerns domestically about ANZ’s Asian ambition was that Australia itself would be left behind. This was widely expressed when the policy was first announced in 2007 and it came back to the fore when the RBS deal went through. “In ANZ I see a bank that’s number four in the banking system,” Brian Johnson at CLSA told Euromoney at the time. “Asia is structurally exciting but ANZ needs to bulk up in Australia and that should be the priority.”

Since then, though, ANZ has won over some of its critics, Johnson included. ANZ used to operate in the vital wealth management area (probably the single greatest preoccupation of Australian banking in the last decade) through an unwieldy joint venture with ING, but bought out ING’s 51% interest in September for A$1.76 billion. “Our whole wealth management strategy was quite clearly dysfunctional while we had that joint venture in place,” says Smith. “We were half pregnant. You’ve got to be one thing or the other. And I think the global financial crisis allowed us an opportunity where we had a distressed seller to become fully pregnant. We are now in control of our destiny on that one.”

ANZ further impressed the market when it hired Philip Chronican, formerly CFO and group executive at Westpac, as CEO for Australia. Analysts seem to love him. “This guy’s absolutely phenomenal,” Johnson says. “I think we’ll see that business grow aggressively now.”

While the market seems less worried than it was, it’s still somewhat cautious. “ANZ still trades at a discount to the banks with larger Australian domestic franchises, and you’ve got to remember that under previous management ANZ also tried to expand in Asia and got warned off by its investors to some extent,” says Stewart Oldfield, analyst at EL&C Baillieu Stockbroking in Melbourne. “Australian institutions aren’t going to give Mike Smith the benefit of the doubt despite his formidable reputation in Asia unfortunately.”

Smith himself argues: “There was never any idea that we would stop investing in the domestic market. To me the core franchise we have is Australia and it would be absolutely insane to take that for granted or let it reduce. I just like the other stuff to grow faster.”

BOX: TOO BIG IN NEW ZEALAND?

If ANZ does become a super-regional bank, an Asian heavyweight with a core franchise in Australia, then one bit of it’s going to look mighty top-heavy: New Zealand, which generally accounts for 20-25% of group lending and deposits. “They are way, way too big in New Zealand,” says Johnson.

Asked if ANZ is too big in New Zealand, Smith says: “Would you want to be the biggest bank in New Zealand or the biggest bank in China? It’s quite an easy answer I suppose. But we are where we are.” The position has perhaps looked artificially bad recently because New Zealand’s economy has done so much worse than those of Australia and most of Asia. “The disadvantage of being the biggest bank in New Zealand was the last couple of years when the economy absolutely fell over. But I guess you could then argue it’s best in a recovery to be the biggest bank because you’re going to see the most benefit.”

But would the assets be better deployed elsewhere? “New Zealand can provide good annuity income,” Smith says. This annuity stream, at a time when a funding base is going to be important to ANZ regionally, seems to suggest a sale is unlikely. “But do I want to buy another bank there? Quite clearly no.”

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