THE DISTILLERY: Regional banking ramp-up

Jotters break down the broader implications of the ANZ result as Australian banks look for growth in Asia.

ANZ Bank’s three rivals and the broader benchmark index finished yesterday’s session flat, or in positive territory. The results presented by chief executive Mike Smith, you’d assume, must have been slightly disappointing.

Not so! Well, not really. ANZ’s share price was a little overcooked, the domestic economic slowdown is unavoidable and banking returns aren’t what they used to be anyway. But the ever-patient ANZ boss Mike Smith is developing an Asian strategy that’s delivering diversification and compelling returns that its main rivals are taking notice of.

Firstly, The Australian’s John Durie explains how in the context of bank earnings in the current environment, where "flat is the new up,” ANZ’s results are actually pretty good.

"If Smith was miffed at the initial market response he can take some comfort in the fact the bank is exceptionally well prepared for an era of slower revenue growth, with lower operating expenses pushing down its cost-to-income ratio. The bank operates back-office hubs in centres including Manila, Mumbai, Melbourne, Suva and Chengdu, which have reached the point where scale benefits are starting to increase and can only get better. Over 21 per cent of group revenues now come from outside Australia and New Zealand, and risk is being taken out of the business with increased focus on trading finance revenues, which form a good base to increase client relationships."

Fairfax’s Eric Johnston explains how bad debt charges are likely to rise thanks to the Australian economic slowdown, but Smith is declaring victory in his quest to secure a big chunk of the bank’s earnings from Asia. Indeed, imitation is the ultimate form of flattery, and Business Spectator’s Stephen Bartholomeusz explains how the other three banks have been going a bit Asian recently.

"It has been notable that in recent weeks ANZ’s peers have been talking up their own Asian aspirations, albeit that they are largely planning to follow their customers and trade flows into the region rather than aggressively pursue intra-region business, in order to open their own windows for growth outside the broadly flat-lining domestic market. Mike Smith’s measured and cautious execution of ANZ’s super regional strategy is not just a point of difference for his group but one that is delivering both growth and diversification.”

Meanwhile, The Australian’s Richard Gluyas looks at the release of ANZ’s collective provisions, which Smith attempted to portray as simple accounting technicalities.

"Provisioning is a dark art but the rules stipulate it's not there as window-dressing. So if an auditor judges that the collective provisions are too high for the economic cycle, then they must be released and treated as profits. They can't just sit there forever. Smith's argument, then, is that his hand was forced. The counter-argument is based on perception rather than accounting rules – it just doesn't look good to release collective provisions when the bank's commentary about the outlook is subdued. The strange thing is that National Australia Bank also got whacked last week but for doing precisely the opposite to ANZ. It raised its economic-cycle collective provision by $250m before tax, due to a lower growth outlook."

And Fairfax’s Malcolm Maiden explains how Smith believes this third round of quantitative easing from the Federal Reserve could vary from previous injections. In QE1 and QE2, liquidity found its way around the globe, pushing commodities up beyond fundamental supply-demand support levels and subjecting Asian countries to import price inflation pressure.

"What Smith has been hearing on his travels around Asia is that the latest round of quantitative easing might produce the same effect – and if it does, it will be a new wild card, as Asian economies put the brakes on to counterbalance the inflationary surge. It was a crackdown of this kind in 2011 that pushed China's growth down below 8 per cent this year, raising fears that China's growth engine had accidentally stalled. As Smith also observed yesterday, a spike in commodity prices would not necessarily be a good thing here, either. It would be welcomed by the miners, but the Australian dollar would rise, maintaining and perhaps intensifying the exchange rate pressure on non-mining companies.”

Fairfax’s Adele Ferguson suggests that Echo chairman John O’Niell might not have been totally straight with us yesterday when he was asked to play ‘what id’.

"Hindsight is a wonderful thing and for Echo Entertainment the big question is whether the board would still have rejected James Packer's request for a board seat six months ago had they known what was about to play out with both sides of politics. According to Echo Entertainment chairman John O'Neill, the answer is no. But the brutal reality is if Packer had joined the Echo board and worked out a joint venture deal that was beneficial to Echo and Crown shareholders over a six-star casino, hotel and entertainment complex at Barangaroo Central, Echo wouldn't be facing the spectre of a second casino licence when its exclusivity deal expires in 2019.”

In a similar fashion, Business Spectator’s Bartholomeusz says Packer has manoeuvred Echo between a rock and a hard place.

In other big company news, Fairfax’s Elizabeth Knight explains how the results from Coles have put the surprisingly encouraging figures from Woolworths last week into a less enticing context.

Meanwhile, The Australian’s Bryan Frith looks at the jostling between Drillsearch and its takeover target Acer Energy.

Elsewhere, The Australian’s Glenda Korporaal argues that news of the Future Fund’s review of its tobacco investments shows that it is not immune from political influence, in spite of the fact that it was designed to operate outside such considerations.

The Australian Financial Review’s Chanticleer columnist Tony Boyd says that if the head of the world’s largest coal producer, Peabody Energy, is telling this country that we’re becoming the most expensive place in the world to do business, Canberra should sit up and take notice.

And finally, The Australian’s economics correspondent Adam Creighton argues that the bureaucracies of our country’s universities are in need of serious trimming, which would make an easy way to reduce inefficiency in our economy.