Will investors' love of yield hold ANZ back?
Australian institutions have no confidence in Australian companies expanding into Asia.
Seek is thrusting into Asia and the institutions refuse to give that thrust any worthwhile market premium. The same has applied to Qantas.
And when it comes to buying a major asset in Asia, it is a big thumbs down.
Amid this environment, ANZ is once again rumoured to be looking at buying an Asian bank. This time it’s Hong Kong's Wing Hang Bank. If the ANZ is serious about being an Australian bank in Asia, eventually it must buy an Asian bank.
Whether the Wing Hang Bank is suitable is, of course, an issue that requires close examination by ANZ. I have no knowledge about its suitability.
But even if Wing Hang turns out to be absolutely perfect for ANZ, such an acquisition will dilute earnings in the short term because you can’t buy good Asian banks cheaply. Australian institutions price all our banks for yield, making their shares almost akin to an interest bearing security.
This is an extremely dangerous way of valuing banks (or any business) because it restricts the ability of the enterprise to invest in innovation that does not yield immediate returns and makes expansion offshore almost impossible.
When British banks were available at very low prices, the National Australia Bank did not have the option of taking advantage of the situation because of the effect it would have on NAB short-term profits.
The Australian dollar is high and this is a perfect time for ANZ to make a bigger move into Asia if it can find the right acquisition. It’s not easy. In Indonesia, ANZ is finding the going tough because of the Indonesian government’s restrictions on foreign ownership. This is something ANZ chief Mike Smith no doubt raised when he accompanied Tony Abbott on the latest trip to Indonesia. Yet for many Australian companies, long-term growth requires them to expand their horizons into Asia. And that is a clear message coming out of the Abbott Government.
Mike Smith and his directors have set out their Asian strategy and, if the Wing Hang Bank is a good long-term buy, then they should take the plunge. They will need to sell it to their wider shareholders and, if necessary, take on the institutions. If rules need to be changed to enable banks to more easily expand abroad, then Mike Smith will get a sympathetic hearing from Tony Abbott.