ANZ may sell Asia bank stakes due to stringent capital rules

August 15, 2012

MELBOURNE, Aug 15 – Australia and New Zealand Banking Group would consider selling some of its stakes in Asian banks if Australia does not ease stringent capital requirements, chief executive Mike Smith said today.

The plan raises questions about how Australia’s smallest ‘Big Four’ bank will meet the profit targets it has set for offshore operations.

ANZ owns stakes in eight banks in the region, including 39 per cent of PT Panin Indonesia Bank, 24 per cent of AMMB in Malaysia, 20 per cent in Shanghai Rural Commercial Bank and 17.6 per cent in Bank of Tianjin in China.

Due to capital rules proposed by Australia’s banking regulator for minority stakes, ANZ’s holdings in Asian banks are expected to drag down its return on equity. ANZ has urged the regulator to ease the requirements which it says are tougher than proposed global industry standards.

Smith said if the Australian Prudential Regulation Authority does not rule in ANZ’s favour, then the bank would consider selling down its minority stakes.

“It does mean you have to look at your options,” Smith said in an interview, ahead of the bank’s third-quarter report due on Friday.

The partnerships, mostly initiated before Smith joined ANZ in 2007, are one element in his strategy for ANZ to earn 25 to 30 per cent of its profit from outside Australia and New Zealand by 2017.

That goal was set last year when the bank appeared well short of an earlier target for Asia-Pacific to contribute 20 per cent of the group’s profit by 2012. ANZ expects that contribution to be more than 18 per cent by the end of its 2012 financial year, Smith said.

Under current capital rules, ANZ has a common equity Tier 1 capital buffer of 8.9 per cent. Under the Basel III requirements, set to be implemented from next year, that buffer would be measured as 9.8 per cent, thanks to a 10 per cent allowance for minority investments in other banks.

But Australia’s proposed rules under Basel III will not include the 10 per cent allowance, effectively forcing the bank to hold more capital.

ANZ shares ended down 0.6 per cent today, in a broader Australian market that shed 0.3 per cent.

LOWER RETURN
The CEO said shareholders may have to live with a lower return on equity (ROE) from ANZ’s Asian holdings at least over the next five years as eventually that is where the bank’s growth will come from rather than from its mature Australian businesses.

“It may well be that you have to maintain a lower ROE business for strategic reasons because it is going to pay you dividends in due course. That’s the call,” he said.

ANZ’s return on equity is 16 per cent, down from 20 per cent in 2007, but the bank is holding 60 per cent more capital than five years ago, Smith said. That compares with an ROE of 18.6 per cent reported by Commonwealth Bank of Australia today.

Underscoring concerns it has about investing in minority stakes, the bank recently declined to participate in a capital-raising by Bank of Tianjin, resulting in the dilution of ANZ’s stake in the Chinese bank to 17.6 per cent from 20 per cent.

Smith (picture, left) did not rule out selling down that stake, including if ANZ was allowed to build a bigger stake in another bank, such as Shanghai Rural Commercial Bank.
“It depends on what the opportunity is, and it depends on what the relationship is like, in terms of where you see the upside.”

He said the relationship with Bank of Tianjin was okay, but not as good as it is with Shanghai Rural Commercial Bank.
“It’s producing something, but I’d like a bit more out of it,” he said of the stake in Bank of Tianjin.

The CEO is betting that when China reviews its stance on foreign ownership of banks in the country, it will allow ANZ to increase its stake above 20 per cent in only one of its holdings, not both.

“So you just have to position yourself for where this is likely to fall out,” said Smith, who was sporting his favourite golden abacus cufflinks bought in Hong Kong eight years ago when he headed HSBC’s Asian operations.

CHINA-INDIA BRIDGE
ANZ, though, is targeting Thailand and Myanmar for expansion. Smith sees the two countries as an important link between the rapidly growing markets of China and India.

“Strategically that land bridge between India and China has got to be worth something,” Smith said.
He said the bank has been cleared by the Australian government to make a foray into Myanmar, where ANZ hopes to have a representative office by early 2013.

And ANZ is eyeing a banking licence in Thailand in 2014, as the best way to break into that market, as it is looking to meet demand from its customers in Vietnam and Cambodia for a presence in that market.

“Thailand’s a more difficult one, in that its regulation has always been a bit tougher than many other countries. It has always been a very nationalist place,” Smith said.

“But the next round of licences are likely to be in 2014 and I hope that ANZ will be on that list – top of the list would be really nice.”

Smith did not rule out picking up stakes in Thai banks that may be up for sale, such as ING Groep’s stake in TMB , Thailand’s seventh-largest lender, or General Electric’s one-third stake in Bank of Ayudhya, but said given the capital requirements that would not be its preferred option.

Thailand limits foreign ownership in domestic banks at 49 per cent but buyers can negotiate with the central bank and the government if they want to buy more than that.

“I wouldn’t be as interested in a stake in a local bank there. I’d rather have our own operation,” Smith said.
“That’s not to say that would always be the case, but particularly while we have these capital rules hanging over our head it makes a decision like that a little more difficult.” – Reuters