Asian expansion – the big bank edition

Both the stakes and rewards are raised when companies expand offshore

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Yesterday, I noted the poor track record of Australian businesses attempting to expand overseas.  I forgot to mention that even our Big Fella is not exempt.  BHP Billiton Limited (ASX: BHP) lost billions in shareholder value in their Magma foray in the nineties.

The history of disasters suggest that any investor betting on successful overseas expansions by ASX listed companies is engaging in a low probability bet.  Having said that, the bounty that comes with success is mouth-watering.   Just ask any long-term Flight Centre Limited (ASX: FLT) shareholder.

Shareholders of the major ASX listed banks must now consider the exact same issue. Having reached saturation and with limited growth prospects in the domestic market, our big four banks are all looking towards further growth by expansion.  Rather than attempting to pick the winners, we suggest that investors should consider which of the banks embarking on expansion is least likely to destroy value.

Today, we examine and compare the strategies of Australia and New Zealand Banking Group (ANZ) and Commonwealth Bank of Australia (ASX: CBA).

ANZ – super-regional

ANZ CEO Mike Smith has been beating the Asian expansion drum for the last 4 years.  The author is puzzled as to how a team of ex-HSBC executives running an Australian bank can succeed in the tough Asian market, especially since the venerable HSBC has continually found it tough in China.

To identify the magic ANZ sauce, we looked at the ANZ's CEO Address of 16 Dec 2011:

"This reflects our strong belief that a portfolio diversified by geography, by customer segment and by product will deliver differentiated revenue growth and long-term shareholder value –growth and value that are simply not available with a domestic only strategy."

The message here appears to be that having many fingers in many pies is better than having one full hand in a single pie.

We then looked at the Group Strategy Update published on 18 March 2012.  ANZ's strategy is to capture a part of the growing Asian market and become a leading super-regional bank.  The update referenced a "consistent coherent strategy –connectivity driving competitive advantage."  There is a mention of cross-border customer focus, technology and operations hubs, "throw and catch" capability and culture, and a whole lot of other fancy ideas.

I concluded that there will always be things which I cannot understand.  My best attempt at a plain English translation is this:

"We believe very strongly that Asia is where the big money is to be made.  Asia is growing strongly whilst the West is going backwards.  We do not want to stay in Australia only.  We want to go into all these Asian countries and become a super regional bank with a presence everywhere. Our strength is in having a tentacle in every part of Asia- connectivity and cross-border."

CBA – a logical continuation

Commonwealth Bank published its Group Strategy Update on 19 April 2012. The heading is tellingly succinct- A Logical Continuation.  CBA identified its competitive edge in three areas – application of technology to financial services, customer focused culture and a strong balance sheet. CBA's strategy is to improve its competitive edge i.e. widening the moat.

By improving its competitive edge, CBA aims to grow the domestic retail market through identifying unmet needs and by improving productivity.  A recent example is its mobile payment app called Kaching.  Improving its competitive edge also underpins growth outside Australia, by transferring existing capabilities and value-adding.   CBA also emphasized "a disciplined approach" to mergers and acquisitions and a "focus" on return on equity.

The translation into plain English appears to be:

"We are good at technology, customer service and financial discipline.  We will continue to improve these areas. Some of our expertise can be used in markets outside Australia. We will not expand just for expansion's sake.  Anything we do must benefit shareholders financially, which requires a good return on shareholder capital."

Foolish take-away

Two different strategies – one loftier, the other less aggressive and perhaps with less upside (and less put at risk).  A (perhaps rhetorical) question: If management is unable to deliver a clear message to the investment community, what are the chances of management being able to deliver a clear message to its employees?

The mere fact that a strategy was communicated clearly does not guarantee that the strategy will work, or that the strategy will be executed in the manner as communicated.

However, a strategy that is not communicated clearly is not capable of being executed, much less being successful.

If you're looking for income from your shares, look no further than "Secure Your Future with 3 Rock-Solid Dividend Stocks". In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

More reading

The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »