ANZ's Incoming Boss Has New D.I.Y. Task: Remodel Asian Business

  • Elliott seen as less wedded to Asian targets than Smith
  • Bank has cut back on trade finance, looking to reduce loans

Australia & New Zealand Banking Group Ltd.’s incoming Chief Executive Officer Shayne Elliott likes to spend his weekends renovating his five-bedroom home in the affluent Melbourne suburb of Toorak.

When he takes over the bank in January, the 52-year-old New Zealander will need to roll up his sleeves for something else -- a re-modeling job on ANZ’s underachieving Asian business, which has been a drag on the bank’s profits and share price in recent years.

Elliott is expected to trim, rather than exit, the overseas operations, which consumed nearly a third of the bank’s capital in the year to September, while accounting for less than one-fifth of profits. But he is seen as much less wedded to the aggressive Asian expansion strategy pursued by his predecessor, the outspoken Mike Smith, who has run the bank for the past eight years.

“Once Smith’s gone, it’s Shayne Elliott’s right to change it,” said Simon Burge, chief investment officer of Above the Index Asset Management, who oversees A$450 million including ANZ shares. “He’s not the bastion for the theme of ‘let’s go to Asia regardless of what it costs.’ I wouldn’t be surprised if he dials back in Asia.”

Elliott, who has been the bank’s chief financial officer since 2012, already flagged his focus on improving Asian returns in October, when the bank reported its slowest growth in annual profit since 2008.

Hard Decisions

ANZ said Oct. 29 it would cut about A$9 billion ($6.5 billion) of low-yielding trade finance exposures in Asia by not extending some loans that have matured, and will look to reduce its corporate loan book in the region. Instead, the bank will aim to expand its cash transaction business in areas such as cross-border payments, collections and investment services for clients. Elliott may also look to sell some of the company’s shareholdings in Asian banks to release capital.

The recent plunge in commodities prices and the slowdown in China have hurt trade finance and other ANZ operations in Asia, and raised questions over Smith’s expansion plans, which more than doubled the number of Asian corporate clients in the past seven years and almost tripled the number of employees in the region to 21,000.

“We’ve taken some hard decisions around the trade business in particular, which is a really competitive business in Asia,” Elliott told reporters on an Oct. 29 conference call, about four weeks after his promotion was announced. “From time to time, it’s a great business, and when we have excess liquidity, we can participate.”

Domestic Focus

As ANZ’s rivals maintained their focus on their domestic businesses, at a time when property prices in Australia and New Zealand have surged, the contrast in terms of share-price performance and returns has become sharper.

ANZ shares fell 1.2 percent to A$25.90 at 1:46 p.m. in Sydney on Monday, the least among the nation’s four largest lenders. The shares declined 18 percent this year through Friday, outpacing Commonwealth Bank of Australia’s 7.4 percent drop and the 10 percent slide in the country’s bank index.

Exchange filings show that ANZ posted a return on equity for the year ended Sept. 30 of 14 percent. By contrast, larger competitors Commonwealth Bank and Westpac Banking Corp. garnered ROEs of 18.6 percent and 15.8 percent, respectively, in their most recent financial years.

“ANZ needs to have a glorious Asian exit,” said Brett Le Mesurier, a Sydney-based analyst at APP Securities. “The institutional business in Asia has an extremely low return way below the cost of capital. I always thought they had an insufficient strategic advantage to generate the return.”

Internal Candidate

ANZ’s Chairman David Gonski acknowledged in a Dec. 3 interview that Elliott will have to work out whether capital is being efficiently used in some areas of the bank including in Asia. Still, Gonski said ANZ over the next three to five years should take advantage of what it has established in the region and look to build it into a pan-Asian enterprise. The bank would also seek to expand in New South Wales state, which has Sydney as its capital, he said.

In elevating an internal candidate, the board “felt we were in a position where we were happy overall with the strategy that bank is taking,” Gonski said. “That doesn’t mean that the strategy doesn’t need to be worked, be made flexible and so on, but on the other hand, what it does mean is the general direction, we are happy with that.”

Smith, who joined ANZ in October 2007 after almost three decades at HSBC Holdings Plc, had set a target of doubling the profit contributions from businesses outside Australia and New Zealand to as much as 30 percent of total earnings by 2017. The figure stood at 17.1 percent as of September, and the target could either be abandoned or “dialed back,” according to Above the Index’s Burge.

Elliott may consider selling the ANZ’s stakes in regional banks, which impose higher capital requirements to hold, according to Above the Index’s Burge. Those holdings, which include shares of PT Bank Pan Indonesia, Malaysia’s AMMB Holdings Bhd., Shanghai Rural Commercial Bank and Bank of Tianjin, were valued at A$5.4 billion as of Sept. 30, according to its annual report.

ANZ is seeking bidders for its 39 percent stake in Bank Pan Indonesia, according to people with knowledge of the transaction.

Economic Lessons

Elliott may not have the direct approach of Smith -- who in 2010 said the then opposition Treasurer Joe Hockey was “taking economic lessons” from Venezuela’s Hugo Chavez -- but he has shown he can turn around a business.

First hired by ANZ in 2009 as head of institutional banking, Elliott took over a division plagued by an equities lending scandal that had cost some senior executives their jobs. The University of Auckland graduate refocused the business on transaction banking and trade, boosting underlying profits by 82 percent in his first year on the job.

“If there’s someone who can work through to extract better returns from the invested capital, he is one of the better candidates out there,” said David Ellis, a Sydney-based analyst at Morningstar. Elliott has a “strong exposure” to Asia and institutional lending, and is one of the few individuals who has a grasp of ANZ’s business and the challenges it faces, he said.

International Career

Elliott’s career began on Citigroup Inc.’s derivative trading desk in Auckland in the mid-1980s. He spent about 20 years with the U.S. bank, working in cities from London and New York to Cairo and eventually Hong Kong, where he led the lender’s Asia Pacific transaction-banking business.

He then spent three years at Egyptian investment bank EFG-Hermes Holding SAE, which he left for a break from banking in the wake of the global financial crisis. In 2009, a recruiter telephoned Elliott, the product of Auckland’s working-class western suburbs, while he was painting an apartment in Rome he had just bought, and offered him an interview with ANZ.

By his own account, he turned up for a video interview set up in a nearby church, wearing a t-shirt as he didn’t have a suit with him. While he had intended to stay away from banking, he agreed to join ANZ largely because of its quest to build a “super-regional bank,” Elliott said in an October post on the lender’s website shortly after being named CEO.

“I just loved the ambition,” Elliott said in that post. “When you go back, the people that we aspire to emulate, we look at those franchises, those things were built 50 and 100 years ago, so ANZ’s ambition is quite bold. That was really attractive.”

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