Mike Smith's ANZ Shows the Perils of Prediction: David Fickling

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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Predictions are hard, especially about the future. When former HSBC Asia head Mike Smith took over as chief executive of ANZ Banking Group in October 2007, he shifted emphasis toward Asian economies forecast to grow three times faster than rich countries.

With the U.S. subprime crisis leaving Countrywide Financial teetering on the edge of bankruptcy and Australian house prices having jumped 52 percent in five years, the approach looked sound. While Commonwealth Bank and Westpac bulked up on domestic home loans with the 2008 acquisitions of, respectively, BankWest and St George, Smith’s major banking deal was the $550 million purchase of RBS assets across Asia in 2009.

With Smith announcing Thursday he’ll be stepping down from the role at the end of the year, the results of his strategy have been underwhelming:

Dividends improve the picture a bit. A$100 ($71) of ANZ shares would have returned about A$44 over Smith’s tenure once payouts are included, almost double the A$26 you’d have got out of National Australia Bank, according to data compiled by Bloomberg. But both banks trail the A$71 you’d have got investing in Westpac or the A$102 you’d have made from Commonwealth Bank of Australia over the same period.

What went wrong?

One problem was new Basel banking rules that forced lenders to set aside more capital against minority stakes in other financial institutions. That cut the returns on equity from ANZ’s stakes in banks in China, Malaysia, Indonesia and Vietnam, dragging down the whole company in the process:

The other issue was the resolute refusal of Australia’s housing market to implode like its peers in other developed countries. A run of interest-rate cuts have driven home values in Sydney up 43 percent over the past three years. Treasury Secretary John Fraser thinks that city’s market is is unequivocally in a bubble -- but it ain’t burst yet.

Smith may still have the last laugh. Loans to landlords are slowing and auction clearance rates are falling in Australia. Goldman Sachs thinks the housing market is 20 percent overvalued. In addition, local banks will have to set aside more capital for domestic home loans under new rules coming into force next year.

And while Asia doesn’t look too hot right now, Chinese manufacturing data Thursday suggests that country’s slowdown could be stabilizing. In the long run, Australia’s resource-dependent economy will struggle to prosper without growth in its Asian neighbors, so the idea of expanding in the region retains merit.

One day, Smith may be proven right. Right now, it looks like he mistimed the market.

To contact the reporter on this story:
David Fickling in Sydney at +61-2-9777-8652 or
dfickling@bloomberg.net
To contact the editors responsible for this story:
Paul Sillitoe at +852-2977-6726 or
psillitoe@bloomberg.net