After spending more money on acquisitions across Asia than any domestic rival, Australia & New Zealand Banking Group Ltd. (ANZ) would do better for its shareholders by unraveling some of that wager.
ANZ has spent at least $1.95 billion since 1999 on Asian deals, landing minority stakes in banks and brokers from China to Indonesia, according to data compiled by Bloomberg. The holdings -- now valued by ANZ at $3.64 billion -- have proven less lucrative than ANZ’s own operations there and selling them would reverse a strategy that has defined the bank since 2007.
With little chance ANZ will ever have management control to improve the performance of some of the Asian assets, the Melbourne-based bank’s stock has trailed Australian peers in the past year, said BBY Ltd. New rules requiring the bank to set aside more capital against the foreign stakes are making them even less appealing, said Morningstar Inc. ANZ’s return on equity is projected to slip below all three of its major domestic rivals by 2015, analysts’ estimates compiled by Bloomberg show.
“They should just sell them,” Brett Le Mesurier, an analyst at Sydney-based stockbroker BBY, said in a phone interview, referring to the minority stakes. “It makes no sense. It’s alright if it’s a road to somewhere, but we’re not seeing much evidence of that. Shareholders are running out of patience.”
ANZ fell 2 percent to A$28.41 at the close in Sydney.
Minority stakes “should involve a pathway to control over the medium to longer term or strong strategic rationale,” ANZ spokesman Paul Edwards said in e-mail, declining to comment on specific units. While the bank’s approach to such investments is creating value for shareholders, the strategy in Asia is mainly focused on ANZ-branded assets, he said.
ANZ opened for business as the Bank of Australasia in 1835, when the country operated as a British penal colony. A local merger in 1951 created ANZ Bank and since 1971, the company has opened offices and branches in China, Malaysia, Thailand, Singapore, the Philippines and Vietnam, according to a history of the bank on its website.
Michael Smith, the former head of HSBC Holdings Plc’s Asian operations, took over at ANZ in 2007 and pledged to generate more income from the region’s faster-growing markets, distinguishing it from bigger rivals at home.
Australia’s banking market is dominated by four lenders, led by Commonwealth Bank of Australia (CBA) and Westpac Banking Corp. (WBC), which compete in a market where credit demand has languished since the financial crisis.
Smith plans to increase the proportion of income from outside Australia and New Zealand to 30 percent by 2017 from about 21 percent last fiscal year and 8 percent when he arrived, according to the company’s full-year earnings presentation. His largest purchase toward that goal was in August 2009, when he agreed to pay Royal Bank of Scotland Group Plc about $550 million for retail and commercial businesses across Asia, data compiled by Bloomberg show.
It’s with a clutch of smaller investments in companies where returns are lagging and ANZ has no control that Smith faces a potential dilemma.
“You have to be clear there’s a route to advance those investments, to gain control, otherwise you’re better off deploying the capital elsewhere,” Ross Curran, an analyst at Commonwealth Bank in Sydney, said in a phone interview.
The most valuable of ANZ’s minority stakes is a 24 percent share of Kuala Lumpur-based AMMB Holdings Bhd. (AMM), Malaysia’s sixth-biggest bank. Acquired in 2006 for A$833 million, ANZ now values the holding at A$1.14 billion ($1.17 billion), according to the bank’s 2012 annual report. The stake would fetch the equivalent of A$1.5 billion, based on AMMB’s stock price yesterday.
In Malaysia, while foreign ownership of banks is capped at 30 percent, the central bank has said it may waive that restriction in certain cases.
In Indonesia, ANZ owns 39 percent of PT Bank Pan Indonesia, which it values at A$668 million. That stake is now valued on the stock market at the equivalent of about A$790 million.
Indonesia’s Mu’min Gunawan family considered selling its 46 percent stake in the bank in 2010, an official at the bank said at the time. Although Reuters reported that ANZ was a leading candidate to buy the shares, no deal was struck.
“If the other parties are not willing sellers, then it does limit ANZ’s options,” said David Ellis, an analyst at Morningstar in Sydney. “If they want to establish 100 percent- owned businesses in Indonesia (PNBN) and Malaysia, they’re caught. Perhaps the other option is to get out.”
Like AMMB, the Indonesian stake was purchased before Smith’s tenure as CEO began. He said this month that he would consider selling the stake at the right price, the Australian Financial Review reported April 4.
ANZ also owns 20 percent of Shanghai Rural Commercial Bank, and an 18 percent stake in both Bank of Tianjin Co. and Ho Chi Minh City-based stockbroker Saigon Securities Inc.
The investments are lagging behind ANZ’s own businesses at home and abroad. In isolation, profit from the Asian minority investments rose only 3.8 percent to A$330 million in the year ended September 2012, filings show. As a whole, ANZ’s net income from the Asia Pacific region, Europe and the Americas climbed 22 percent to A$908 million.
‘Do It Yourself’
The success of ANZ-branded businesses in Asia is another reason to exit the investments, said John Buonaccorsi, an analyst at CIMB Group Holdings Bhd. in Sydney. ANZ has branches even in countries where it owns the minority stakes. In Indonesia, the bank has 28 of its own ANZ-branded branches, for example.
“They’ve built up massively under the ANZ banner,” Buonaccorsi said. If ANZ had to do it all again, they’d probably build their own branch network, he said. “Do it all yourself, get a banking license and build it up slowly.”
In the 12 months through yesterday, ANZ shares climbed less than peers. The 25 percent gain by ANZ trailed a 36 percent climb by Commonwealth Bank, a 44 percent jump at Westpac and a 27 percent advance by National Australia Bank Ltd.
New banking rules require ANZ to deduct the entire value of the overseas investments from Tier 1 capital, funds to protect a bank against potential losses. Formerly, only half of the value of the investment was deducted.
“That’s potentially a trigger” for asset sales, said Buonaccorsi. “Selling one or two of these stakes would keep the regulators here happy and also give them a little bit extra just in case something comes up.”
Deutsche Bank AG analysts last year estimated the return on equity -- a measure of how well shareholder money is reinvested -- from ANZ’s minority stakes would fall to 10 percent from 15 percent under the new capital rules. In the last fiscal year, ANZ’s return on equity across the whole group was 14.6 percent, according to data by Bloomberg.
ANZ’s ROE will remain unchanged through 2015, meaning the bank will fall behind its three main Australian rivals in two years, estimates compiled by Bloomberg show.
“If you can’t solve the ROE puzzle, pack up,” said Le Mesurier at BBY. “It’s very easy to throw capital at it. It’s another thing to get a decent return.”
Any sale would take place as other large banks seek to expand into Asia. Japan’s Sumitomo Mitsui Financial Group Inc. and Mitsubishi UFJ Financial Group Inc. have both discussed a potential purchase of TPG Capital’s $1.8 billion stake in Indonesia’s PT Bank Tabungan Pensiunan Nasional, people with knowledge of the matter said last month.
Mitsubishi UFJ is also interested in buying a stake in Thailand’s Bank of Ayudhya Pcl from General Electric Co., it said, while South Korea’s Hana Financial Group Inc. is seeking to buy a bank in Indonesia, the Korea Economic Daily newspaper reported last year.
To be sure, some of ANZ’s stakes hold strategic value for the company, providing local expertise in a developing market. For instance, ANZ must have a presence in China, said Curran, the analyst at Commonwealth Bank.
“You’re operating under certain ownership restrictions, but a bank of ANZ’s size has to be there,” he said.
There are signs ANZ is backing away from some investments. The bank last year sold its stake in Vietnam’s Saigon Thuong Tin Commercial Joint-Stock Bank to develop its own business. The bank also opted out of a rights issue at China’s Bank of Tianjin, diluting its stake from 20 percent to 18 percent.
In a December presentation about its “super regional strategy” the bank acknowledged that “partnership investments are something that will be kept under active review” because of the new capital requirements.
“The tougher rules make these sorts of investments less attractive,” said Ellis, the Morningstar analyst. “If they persist with them, their return on equity won’t grow as fast. In this world of intense focus on capital efficiency, it wouldn’t surprise me if someone like ANZ was looking to exit some of these.”
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