Michael Smith: ANZ's rough diamond bows out

Sometimes bombastic and always candid, Michael Smith will be remembered as the man who went out on a limb to augment ANZ’s Asian banking strategy. 

In December, Smith resigns as chief executive of the Australian bank after eight years at the helm. During this period, ANZ’s total assets more than doubled to A$890 billion ($644 billion) and profits nearly doubled to A$7.2 billion.

Smith hasn’t always been applauded for his so-called super-regional strategy and has had to show patience against often-strong market opposition.

He has persevered on the basis that the strategy makes common sense – Australia is geographically close to Asia and the amount of trade flow between nations continues to grow exponentially.

“There is an urban myth in Australia that local companies fail when they expand into Asia, and while there have been a couple of high-profile failures there are also hundreds of examples of success,” he said. “I was always baffled by why no Australian bank had cracked the international market.”

The best example of how hard it can be to make it overseas is National Australia Bank’s troubled investments in Clydesdale and Yorkshire banks in the UK. NAB bought the assets in the late 1980s and has since endured a number of restructurings, trading scandals and write-offs. It is now trying to sell or list the UK businesses.

ANZ’s share price has regularly lagged its peers as investors have tried to weigh up the risks in Asia. Smith partly blames a culture of passive investing.

“The vast majority of investors in Australia are basically index funds. It’s more convenient for them if all the stocks in a particular sector behave in the same way.”

To counter that inertia he has reweighted the shareholder registry to include more foreign institutional investors. “Offshore investors are more familiar with the region and are prepared to do the homework to understand the strategy and its long-term benefits,” Smith said.

Asking investors to focus on the future hasn’t been easy when ANZ’s competitors in the Australian market have been making hay in the booming domestic mortgage market.

“The local banking market in Australia has been extremely profitable since the beginning of the 1990s, which is why the other three major banks have stayed close to home,” said Keith Pogson, a partner at Ernst & Young in Hong Kong, who oversees financial services in Asia. “ANZ’s Asian operations have been a drag on earnings and this hasn’t gone unnoticed.”

Some believe Smith has favoured projects or ideas put forward by his management team that have an Asian flavour, regardless of whether they make financial sense.

“It has been easy to get approval for an idea if you could say it has relevance to Asia due to Mike’s unbalanced fixation on expansion,” said one analyst not wishing to be named.

Smith refutes such claims. “I have always looked at the business from an integrated perspective and not favoured Asia over any other geography,” he said.

ANZ may be able to soothe its sceptics by changing the way revenues are reported. Smith explained: “Take an example of one of our clients in Hong Kong that has a large business in Australia. The reason they bank with ANZ is because of our presence in Hong Kong, but any business we do for that client is booked in Australia, making it look like we are not generating the earnings in Asia.”

Growth plus

Smith could hardly be accused of taking his eye off the Australian business. Recently he has dialled up his emphasis on residential mortgages and digital banking services. In its latest earnings announcement in October ANZ reported a 9% increase in local loans and advances.

In Asia itself, Smith has taken the deliberate decision to focus on fee-based income with about 55% of its regional revenues coming from fees and 45% from net interest income. By contrast, in Australia, fee-based income represents only 25% of revenue. Analysts say ANZ’s Asian cash management and trade finance businesses will begin to pay dividends when the interest rate cycle turns.

Still, overall returns from the region have been impacted by ultra-low rates, excess liquidity, and competition, and it isn’t likely that ANZ will reach its Asian revenue target of 25% to 30% of total revenue by 2017. There is a general sense that Asia remains a work in progress and incoming CEO Shayne Elliott will be focused on monetising Smith’s legacy business.

Elliott shares a similar background to Smith, having spent 20 years at Citi, including a stint as head of Citi’s global transaction services in Asia. As an individual he has a mild, consensus-building management style.

By promoting an internal candidate to the job, ANZ is signalling its commitment to Asia, but  execution  may change.

“Having been [chief financial officer] for three years, Elliott will have a very good understanding of the financial profile of the institutional bank,” said Craig Williams, a banking analyst at Citi in Melbourne. “He is likely to take a harder line against portfolios and businesses that aren’t generating returns above cost of capital.”

One big question is whether it makes sense for ANZ to continue to play in the retail banking space. Smith justified pursuing retail business because it is important to “create a sustainable funding base in the currencies that we operate in.”

But the shifting regulatory environment is a problem. New know-your-client, counter-terrorism, and anti-money laundering rules have become a burden for retail banks. “The systems and monitoring you need to have in place means your business now has to be a substantial size to make it viable,” Smith said.

Eyeing asset disposals

ANZ’s 2009 acquisition of various Royal Bank of Scotland assets in Asia gave it 54 branches with $3.2 billion in loans and $7.1 billion in deposits at the time, but it still doesn’t hold a leading position in any particular retail market.

Smith told FinanceAsia there are already plans to clean up these disparate retail businesses and reduce the bank’s need to fund expensive local loan portfolios. Several months ago it flagged a decision to sell minority stakes in at least two or three Asian banks over the next couple of years, starting with its 39% holding in Indonesia’s Panin Bank. Next might be its 55% stake in ANZ Royal in Cambodia.

“We’re lifting our foot off the retail pedal, particularly in new markets like Thailand where we opened earlier in the year,” he said. “There we will be focusing on banking multinational companies and providing transactional banking services to their suppliers.”

In many ways, that sounds more like Citi’s model, versus the full-service approach taken by HSBC and Standard Chartered.

As Elliott decides how to polish the rough diamond he has inherited he will be able to draw on Smith’s extensive knowledge and contacts. Smith has signed a 12-month non-executive consultancy contract with ANZ starting in July next year.

In the meantime, he is taking an extended period of paid gardening leave and plans to enjoy the Sydney summer.

“I haven’t had a real break for 37 years and I need time to contemplate my next move,” he said. “It’s never too late for a gap year.”

Then and now: full-year results for ANZ from beginning to end of Mike Smith’s tenure

* Net Impaired assets / net loans and advances used to calculate FY15