ANZ bearish on local outlook, focuses on China

ANZ has issued a reminder to investors that returns will be lower and growth slower in the future as higher capital ratios and the increased cost of funds drag on bank profits.

Phil Chronican, ANZ's chief executive for Australia, told a business lunch last week that "banking is going to be more expensive due to the higher cost of funds and higher regulatory requirements".

"As a result, shareholder returns are going to be lower. The leverage effect alone will make it much harder for any bank to achieve the returns - in some cases over 20 per cent - that were common in the pre-2007 environment.

"Growth is going to be slower by virtue of the lower demand for credit, as borrowers remain more risk averse and choose to pay down debt and save at a greater rate."

Chronican reminded his audience that corporate leverage and household credit growth in Australia were now at a 30-year low, while household savings were at a 30-year high.

At a time when banks, and customers, "are having to make some painful adjustments", Chronican said, "the reality is [that] only the depositors are going to be better off."

With "lower and slower" dominating the outlook for the local market, ANZ is progressing plans to develop a mainland Chinese clientele with links to Australia and New Zealand. The bank hopes to exploit the licence allocated to it last month to operate a yuan-denominated retail business in the country.

Charles Li, chief executive of ANZ in China said: "We will focus on the affluent segment … with a further focus on the clients who have a natural linkage with Australia [or] with New Zealand."

Shanghai-based Li spoke with Banking Day in a telephone interview earlier this month. Li joined ANZ following the takeover of the RBS two years ago.

ANZ believes it can offer individual Chinese customers a differentiated service spanning deposits, mortgages and wealth management. It will also offer investment solutions in natural resources such as gold, agricultural products and commodities.

"We’re probably, if not the only one, [one of] the very few which can offer New Zealand-dollar banking account services in China," said Li.

ANZ China, one of the market-makers on the Shanghai gold exchange, has been the best market-maker for several years on the run, said Li.

The bank, which was locally incorporated in October 2010, is confident of taking advantage of its first-mover advantage in developing its retail banking operation – it’s the first Australian bank to secure such a retail licence.

"We have every aspiration to have the largest market share among Australian banks [in China]," said Li, who was promoted to his present role in February 2011.

"The base is still very low.  I wouldn’t be surprised to see, nominally, a very high rate of growth within a few years of hard work."

Li declined to disclose ANZ's financial performance in China in 2011, but confirmed that the bank had seen an 80 per cent year-on-year growth in operating profit during the year. 

According to a KPMG survey, ANZ China reported 2 million yuan in operating profit before provisions in 2010.

The KPMG survey ranked ANZ China as the 122nd largest bank in China, with 22.7 billion yuan in assets by the end of 2010.

Li said ANZ's aim was to capture a 30 per cent share of the banking business from the flow of people and businesses travelling between China and Australia and New Zealand.

ANZ will begin to offer retail services denominated in yuan in the next couple of months.

He said that, on average, 30,000 mainland Chinese students and skilled workers are bound for Australia each year.

This gives the bank a potential retail customer base to serve their families, which remain in China, Li said.

In spite of the global economic slowdown, bilateral trade between China and Australia has been maintained at US$110 billion, with an expected 10 to 15 per cent growth a year. This also paints a rosy outlook for the bank’s existing corporate banking business in China, according to Li.

Although retail business often generates a thinner margin than that from corporate banking for banks in China, Jin Lin, a banking analyst with Orient Securities Co in Shanghai, said the high net-worth segment is a suitable niche for ANZ China to pursue.

"In China, we have this 1:9 rule, which means the top 10 per cent of consumers contribute 90 per cent of the banking sector’s revenues.  So, the high-end clientele market in China is of great potential and highly lucrative," said Jin.

He also noted that the migration market in China is also fast-growing.

To tap into this migration market ANZ China plans to increase its outlets, including branches and sub-branches, to 20 in the next five to 10 years, subject to regulatory approval.

These will be in four focal geographic areas: the Bohai Bay region (including Beijing, Tianjin and Shandong), the Yangtze River Delta region (including Shanghai, Zhejiang and Jiangsu), the Pearl River Delta (around the Guangdong and Shenzhen areas) and the West Corridor (including Chengdu and Chongqing). 

Currently, the bank has 500 staff in its four branches in each of these four geographic areas. It will open another sub-branch in Guangzhou soon, said Li.

"On the average, we’re probably looking at one branch a year, and one or two sub-branches a year."

Li, who holds a PhD in strategic management from Aston Business School in UK, has more than 20 years' banking experience in China and Europe. 

Prior to joining RBS in 1994, Li worked as a financial commentator for the BBC World Service in London and remains an active participant in various executive discussion panels on Chinese and Asian affairs. 

Li was formerly the country executive and head of global banking markets for the Royal Bank of Scotland (China) Co, which was acquired by ANZ Group in August 2009.