The word ‘Asia’ appeared sparingly in ANZ’s first half results on Tuesday, and when it did, its connotations were overwhelmingly negative.
Shayne Elliott, the new CEO delivering his first earnings report to a Melbourne room full of analysts, first mentioned the world’s largest and most populous continent in the context of “tough decisions” he had had to make.
One of these was a revaluation of the bank’s investment in Malaysia’s AmBank, a A$260 million impairment in recognition of the tanking Malaysian economy.
It came up next when he talked about group provisions, half of which, he said, related to “actions by management to exit emerging corporate loan books” in Asia.
And it came up repeatedly when one after another of the nation’s finest bank analysts – Jonathan Mott at UBS, Brian Johnson at CLSA – aimed their questions at ANZ’s Asian loan book and what it was doing to get out of it.
“The reality is that some of the losses that are coming through now reflect a reasonably serious deterioration in a couple of markets in Asia that were a bit surprising, notably Indonesia,” he told Morgan Stanley when the subject was raised for a third time. “But we’re taking decisive action to get ahead.”
And that was pretty much it. No bold predictions of Asia-Pacific trade, no wistful hopes for the potential of the Asian consumer, barely a word about the opportunity on Australia’s doorstep.
It’s a far cry from the grand Asia-Pacific ambitions of the previous ANZ leadership, where chief executive Mike Smith spoke of a “super-regional bank” that would derive 30% of earnings from Asia-Pacific – Tuesday’s result showed 9% of profits came from the ‘international’ division, and just 2% from the Asia retail and Pacific division – and where then-Asia CEO Alex Thursby pushed a bombastic line about dynamic and aggressive expansion.
Elliott gives the impression that those heady days were a period of youthful exuberance that he now has to clear up.
In some respects it is natural that he feels this way. Australian shareholders generally don’t seem to want their national champions venturing overseas, particularly in financial services where there is a long and dignified track record of things going disastrously wrong when they try.
The easy, reliable money in Australian banking is in lending for domestic mortgages, not investing heavily in regional expansion: in cold and immediate terms, building in Asia is bad for the investor.
Elliott repeats a steady mantra of shareholder value, of everything in the bank having to contribute or else there’s no point in being in it. Watchwords are simplification, value, efficiency.
Additionally, even if the bullish expansion of 2008-10 was the right way to go – more than 3,000 new hires in Asia in the space of two years, the $550 million acquisition of RBS assets in six Asian countries – economics and politics have not been kind to that strategy since.
Emerging markets generally have faded and offered less attractive opportunities than the developed world, Australia included, while the operating environment for foreign banks in Asia post-financial crisis has become less accommodating and often more expensive too.
Consequently, the analyst response to Elliott’s first results, despite cash profit down 24% year-on-year and cash EPS off by 28%, was reasonably positive: that the bank is in a tough spot, but Elliott’s decisions are the right ones to get it out of its problems.
However, what happens to Asia now? Deputy CEO and acting CFO Graham Hodges has apparently been tasked with getting the bank out of its minority stakes in AmBank and Bank of Tianjin, while ANZ’s 38.9% holding in Indonesia’s Panin Bank has been publicly on the block since July, even before Smith left.
ANZ changed its accounting treatment of Bank of Tianjin in Tuesday’s results; since the Chinese bank listed in Hong Kong in March, the holding will now appear on ANZ’s books as an “available for sale asset”, a rare example of an accounting term providing a clear expression of intent. A regional network of partnership is being dismantled.
That doesn’t necessarily mean a retreat from doing business under the bank’s own name – after all, the bank sold out of minority stakes in two Vietnamese institutions under Smith in 2012 – but it is hard to detect a shred of positivity from ANZ’s senior management about the continent on its doorstep.
On the ground in Asia, there’s no longer a buzz about the bank; quite the reverse, with job fears and talk of retreat. Elliott has talked about a slimmed-down, more refined bank, and it appears it’s going to shrink until Elliott believes it’s contributing to group value.
It is Elliott’s job to reassure the bank’s shareholders, and so his actions have to be seen within that context, and are probably correct.
However, long-term, there still has to be immense value in a well-constructed and targeted Asian franchise. Once the dust has settled on Elliott’s “tough decisions”, a longer-term challenge will be to make sure he doesn’t throw out so much of the Asia platform that it’s not ready to benefit when Asia one day starts delivering again.