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CFDs
Will ANZ still sing in tune?
Nicholas Way - July 16, 2007
McFarlane has got the ANZ’s personal banking business in tune. His replacement has to keep this on track while building on the push into Asia. Nicholas Way reports
 By any stretch of the imagination it will be a hard act to follow. When Michael Smith steps into John McFarlane’s shoes at the ANZ on October 1, he will be replacing a chief executive who more than trebled the share price in the past 10 years, generated strong earnings growth, enhanced employee morale – and even finding time to play the acoustic guitar.
No doubt the times suited McFarlane – the share prices of all banking stocks over the past decade is testimony to this sector’s buoyancy. That said McFarlane is leaving the bank in much better shape than he inherited it, so much so there was some angst in shareholder land when the board insisted that he pull up stumps.
When McFarlane arrived from Standard Chartered on October 1 1997, the share price was hovering around $8. Today it’s sitting around $29, having briefly traded above $31 in late April. It has been a steady climb as the market gradually came to appreciate the steady hand at the bank’s tiller.
But McFarlane brought more than two decades of banking know-how from Citibank and Standard Chartered to the ANZ; he also brought a strong belief that a motivated – and dedicated – staff was an integral part of a successful banking formula.
For many banks in the late 1990s IT was the wave of the future; branches – and the people staffing them – belonged to the era of John Howard’s white picket fence. At the time, it seemed a news bulletin wasn’t complete without the announcement of branch closures and job losses – especially outside the capital cities.
If customers were angry at branch closures it was only because they didn’t know what was good for them; in time they would realize the Internet was the way of the future – and embrace it. This was the banking model for the 21st century, so get used to it.
Well, not for the ANZ – at least, not since 2001. From that time the ANZ has increased its personal banking staff 29% while branch numbers have jumped from 728 in 2002 to an estimated 823 by the end of this year. As the broking firm Bell Potter succinctly puts it: “Over the past six years, ANZ has maintained a clear strategy of de-risking the bank and increasing its exposure to personal banking. We believe this has created one of the leading personal bank franchises in the country.
“A strong product range and improved staff engagement – that’s broking language for morale – have also led to improvement in customer satisfaction and numbers; since 2005 customers have been growing at double-digit rates.”
It’s not just feel-good stuff. This strategy of investing in staff, of putting numbers on the ground, is paying off where it really counts – the bottom line. In the six months to March 31 2007, the underlying profit for personal banking rose 21.3% to $1205 million – in Bell Potter’s words, the “engine room of the group”. By contrast, institutional banking earnings only rose 4.2% to $1064 million as the bank continues to shy away from low margin banks.
Across the group the cash profit was up 11.8% to $1936 million, and for the full year Bell Potter expects it to topple the $4 billion mark with a cash profit of $4029 million – a 12.3% rise. From this tidy profit shareholders can expect a $1.38 payout – for a fully franked yield of 4.8% based on a $29 share price – after getting 62¢ in their pockets at the halfway mark.
The ANZ’s investment in personal banking reflects a thinking that financial services businesses are over-valued and it will continue down the path of organic growth. At the same time it’s pursuing a policy of expanding into Asia, recently picking up 25% of Malaysia’s AMMB Holding for $833 million, and a 20% stake in China’s Shanghai Rural Commercial Bank for $310 million.
This is the ANZ approach: organic growth at home in lower-risk consumer banking and strategic pushes into Asia, in part reversing the decision to quit the region after selling Grindlays Bank in 2000. [It was acquired in 1984.]
No doubt Smith’s appointment from the Hong Kong Shanghai Banking Corp (HSBC), where he was chief executive of its Asian business, reflects the board’s desire to acquire overseas expertise in this burgeoning market. Countries such as China might be experiencing massive growth as they undergo their “industrial revolutions”, but this doesn’t guarantee steady profits in markets where financial services are often – to be put it kindly – unsophisticated.
The Hong Kong-based HSBC has a long – and successful – history of dealing in Asia, and Smith, who has worked in Australia in its wholesale banking business as well as being NSW state manager (he also worked in Malaysia and Argentina), will come armed with this expertise.
It all suggests McFarlane’s tentative return to the Asian market is about to gather pace. For ANZ shareholders, they must hope it doesn’t come at the expense of the highly profitable personal banking business McFarlane has built in the latter half of his tenure.
More articles from this week's newsletter:
Companies to benefit from the rise of the grey nomads
What is the ideal mix of companies?
Trading: is your bargain stock a lemon?
Investing in a toppy market
Are investment clubs good for your wealth?
Stock of the week: TPI
Inflation: when is 'core' not so core?
CFDs: the best time to trade
Analyst report: gold bull seasonals
Investing: Paying the cost of confidence
Whatever your views, you can discuss this article - or any of Nicholas's articles - on our message board Your 2 Cents.
Nicholas Way is a former senior journalist at Business Review Weekly (BRW), who writes investigative pieces on Australian listed companies.
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