ANZ's (ASX: ANZ) calculated Asian strategy looks set to enable the country's third-biggest bank to outperform its peers in the medium term.
In 2007 current CEO, Mike Smith, launched the 'Super Regional Strategy'. As opposed to Westpac (ASX: WBC) and National Australia Bank's (ASX: NAB) recent Asian strategies, ANZ is actively competing with local banks in the region.
So far, the strategy seems to be paying off and management have set an ambitious target of 25% to 30% of group revenue from the region by 2017. To reach that target it would likely require the bank to make an acquisition. However, as Foolish (capital 'F') investors know, growth for growth's sake is not desirable.
Earlier this year Mr Smith responded sensibly to speculation the bank was making a move on a Hong Kong bank by saying the institutions in the region were "too expensive." That's music to long-term investors' ears.
Although ANZ's Asia Pacific, Europe and America (APEA) and International & Institutional Banking divisions grew strongly in the most recent financial year, the bank also notched up impressive returns from its Australian and New Zealand businesses. Return on equity (ROE) currently sits at 16% across the group and it has the lowest structural funding gap of the big four banks – creating perfect leverage for its ambitious targets overseas.
So although many have doubted ANZ's Asian growth strategy, its diversified earnings will and already have allowed it to drive earnings from both regions concurrently. For example, its domestic banking arm grew profit 11% in FY13 despite a relatively flat net interest margin. Its growth (as a proportion of market share) in home-loans also exceeds that of any of its competitors, including the Commonwealth Bank (ASX: CBA).
ANZ's ability to compete locally and provide international diversification will enable it to differentiate itself from all banks here in Australia in the short to medium term. If we compare ANZ's earnings per share growth from 2008 to that of Westpac's, whose strategy has been to grow its market share here in Australia rather than expand overseas, it has grown by more than 45%, whereas Westpac's has risen 14%. We've witnessed Westpac paying out higher dividends as credit growth has slowed.
Foolish takeaway
According to Morningstar, ANZ is expected to grow earnings by 16% in the next year, compared to single-digit growth from its competitors. Therefore the company's stock doesn't come cheap, investors searching for a big dividend and a healthy growth story are advised to wait for a lower entry price.
