ANZ reaches its tipping point

It was ANZ’s Australian retail business that shone in the latest results, but its Asian diversification model is increasingly persuasive and is catching on with its three main rivals.

The second cab off the bank rank to release profits, ANZ at least partially answered its critics with a peer-beating 7 per cent rise in top line income to $19.6 billion, making it the top revenue-growth bank stock within the sector.

The lender is poised at a dramatic tipping point, positioned to take full advantage of big shifts in the global economy.  Well so bragged chief executive Mike Smith, who also trilled “Asia is now a powerhouse for ANZ,” and added that, “Frankly, there’s more gas in this tank.”

As the only big bank to aggressively pursue Asian markets, ANZ’s point of difference is a play on the growing middle classes in the region.

ANZ’s Super Regional Strategy has always had its detractors. The cynics argue that even if Mike Smith managed to break with a long track record of failure offshore by Australian banks, “time will beat him”.

When Smith moves on, the next CEO and the board may no longer accept the lowest rung on the return-on-equity totem pole that is a by-product of the ambitious Asia region push -- 15 per cent versus NAB’s 17 per cent, as Asian banking is more capital-intensive than Australian banking. (ANZ is targeting 16 per cent ROE by 2016.)

At least 15 years ago, consultants began advising Australian banks that they were obligated to go offshore to justify their share prices due to limited opportunity to grow earnings in Australia. That led to a lot of value being destroyed, as ANZ found with Grindlays in the 1980s, and NAB knows only too well after HomeSide and Clydesdale. And that’s not factoring in ANZ’s cultural and political risk of doing business in countries even more different to Australia’s regulatory environment than the US and Europe.

Against expectations at the start of the year, it was ANZ’s mature Australian retail business that shined over the past 12 months.

But ANZ’s latest earnings are persuasive, showing that 27 per cent of ANZ’s institutional revenue and 29 per cent of global markets revenue stems from its Asia business. Revenue rose 13.4 per cent in Asia. And the weaker Australian dollar only increases the local value of the growing foreign earnings stream.

While rival NAB is doing its darndest over in Europe to rid itself of its unfashionable UK assets at an acceptable price, ANZ expects Asia could make up as much as 30 per cent of revenue by 2017, up from 24 per cent today. And now AMP is busy buying exposure to China’s fast-growing $100bn pension market, taking a one fifth stake in China Life Pension, making it the first foreign company to own equity in a Chinese pension firm.

That market is tipped to be balloon to $700bn by the end of the decade.

The first truly global middle class to emerge in history is on track to more than double in size to close to 5 billion people by 2030. Rapid growth in China and India -- as well as Asian neighbours Indonesia, Vietnam, Thailand, and Malaysia -- could see Asia host almost two-thirds of the global middle class and account for over 40 per cent of consumption in that demographic. Meanwhile, European and American middle classes may shrink from half to nearer a fifth.

ANZ’s Smith stressed that the latest earnings were the culmination of half a decade of work and ANZ has busily “been acting to get ahead of the game.”

AMP has also spent years at it, operating in China since 1997 and slowly developing formal ties with CLPC’s parent, China Life, since 2005, and forming a JV a year ago.

Over at NAB and Westpac, analysts say their fledgling Asian strategies are 10 years behind ANZ’s bedded-down platform in Asia, while CBA is pursuing a different Asia approach altogether within its comfort zone of retail and asset management.

ANZ shares – reinstated after that awkward trading halt at the start of the week  – closed Friday up 0.7 per cent, slightly underperforming the overall market. That limited investor reaction was perhaps in part because cash earnings matched the figures already released prematurely by accident.

But share price movement may be just as muted when Westpac reports its earnings on Monday, and the Commonwealth Bank posts first-quarter earnings on Wednesday after the Melbourne Cup, as the ever-present shadow of expected changes to tier-one capital requirements looms.

“Nobody cares about earnings at the moment, it’s all about Murray. Just look at the share prices over the last two days,” noted one banking analyst.