ANZ Boss Elliott Wields Ax on Asia Units to Boost Returns

(Bloomberg) -- Just 10 months into the top job and Australia & New Zealand Banking Group Ltd. boss Shayne Elliott is taking an ax to much of his predecessor's Asian legacy.

The chief executive officer of the Melbourne-based lender announced the sale of retail and wealth-management operations in five Asian markets Monday and signaled the possibility of more divestments to come: Stakes in Shanghai Rural Commercial Bank, Bank of Tianjin Co., PT Bank Pan Indonesia and Malaysia's AMMB Holdings Bhd. are under review as the bank refocuses its efforts toward domestic markets and its Asian institutional operations.

Such assets are “no longer core,” Elliott said on a conference call on Monday. “If you don't have sufficient scale, over time it just becomes uneconomical.”

The sale of the Asian assets to Singapore's DBS Group Holdings Ltd. for S$110 million ($79 million) represented a “major milestone in reshaping our portfolio,” Elliott said. While he dismissed suggestions that the bank was taking a “big step back” from Asia, the CEO has made clear that the disengagement from low-returning divisions is picking up steam.

“We are in the process of making some very active decisions to reshape our business,” Elliott said.

Under his predecessor Mike Smith, Australia's third-largest bank by market value had set a target to earn as much as 30 percent of profits from outside Australia and New Zealand by 2017. Smith more than doubled the number of ANZ's Asian corporate clients and almost tripled the number of employees in the region to 21,000.

Basel Rules

The logic for expanding in the world's fastest-growing region was undermined by global interest rates stuck close to zero pushing on margins and new banking regulations eating into the return from its network of minority stakes. Rules set by the Basel Committee on Banking Supervision require capital deductions for such shareholdings in other financial institutions.

In its last financial year, ANZ's overseas operations –- primarily in Asia -- consumed nearly a third of the bank's capital while accounting for less than one-fifth of profits.

While it expanded north, its rivals focused on financing Australia's property boom, with telling results. ANZ's return on equity for the year ended Sept. 30, 2015 stood at 14 percent, compared with 19 percent for Commonwealth Bank of Australia and 16 percent for Westpac Banking Corp. in their most recent financial years, filings show.

Strategic Focus

“Banks do face significant challenges if they go outside their home territory,” Sharad Jain, a credit analyst at S&P Global Ratings in Melbourne, said in a telephone interview. There were “significant similarities” between ANZ's experience with banking in Asia, and National Australia Bank Ltd.'s push into the U.K., Jain said.

NAB spun off its U.K. unit earlier this year, which had battled to win market share from Britain's top lenders, and sold 80 percent of its life insurance business. Last week, CEO Andrew Thorburn said the bank was now “totally focused” on growing its domestic business.

ANZ's strategic focus in Asia will now be on reshaping its institutional banking, where it has been jettisoning less profitable clients and focusing on big corporate customers. Its international and institutional-banking division accounted for 37 percent of cash profit in its last financial year.

Positive Step

“We want to grow that, we want to invest in that, but with the right customers in the region and the right return,” ANZ's institutional banking head Mark Whelan said by phone on Monday.

The sale of the Asian businesses to DBS may lower the Australian bank's earnings-per-share in two years by up to 2 percent, but will boost its core Tier-1 equity capital ratio by 15-20 basis points to about 9.4 percent, according to a report from Macquarie Group Ltd.

“We see it as a small but incrementally positive strategic step,” Macquarie said. “Optimisation of its sub-scale businesses in Asia should ultimately lead to improved returns and greater focus on the core franchise.”

Also on the block are the bank's stakes in Shanghai Rural, Bank of Tianjin, AMMB and Indonesia's Panin -- shareholdings that Elliott valued at a combined A$4 billion ($3 billion). “Over time, in no hurry, but over time, we will look to sell those stakes,” he told reporters at a briefing in Hong Kong on Monday.

Exiting such peripheral businesses “releases capital, it releases management time, it de-risks the balance sheet,” S&P's Jain said.

ANZ is due to report its full-year results on Thursday, where executives are expected to give a further update on the bank's strategy. The median estimate of 14 analysts surveyed by Bloomberg is for cash earnings of $6.1 billion, down from $7.2 billion last year.

The bank's shares lost 1.2 percent to A$27.52 as of 2:03 p.m. in Sydney, poised for their fourth decline in five days. The stock has dropped 1.5 percent this year.

--With assistance from Alfred Liu

To contact the reporter on this story: Emily Cadman in Sydney at ecadman2@bloomberg.net.

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Darren Boey