Anton Tagliaferro, the astute founder of Investors Mutual, created a few ripples recently when he was quoted in the Financial Review saying "We're not a big fan of ANZ and their Asian strategy – it's just nonsense. It's just a fad of going where everyone else is going."
Is this a fair appraisal? On one hand, it's only natural a conservative investor such as Investors Mutual prefers the known and predictable; on the other hand, ANZ (ASX: ANZ) is mapping a future. This article reviews some common concerns about the bank's approach.
Why not stick somewhere safe, like home?
No doubt Australia is a comfortable place for banks, and as a result they now dominate market indices and daily trading. As well, they take up 30% of total market capitalisation. Can this be healthy? Australia's share of global GDP is 1% and nearby Asia (ex Japan) is 20%. If you're a financial behemoth it's a no-brainer where to head for growth alternatives.
But Asia is very competitive, and the margins are smaller.
True, however there is a powerful market opportunity to be tapped. With existing investment flows, trade ties, cultural ties and mutual tourism there is a natural space for Australian financial services. Tighter margins are compensated by significantly stronger Asian growth rates.
Sources: Conference Board (2012), IMF (2012c), Maddison (2010) and Treasury projections.
You have to know what you're doing in Asia, deals take time.
Mike Smith, ANZ's chief, is an international banker who had a long career in HSBC, culminating as CEO of this established Asian-based financial institution. It is safe to assume he knows the ropes and how to go about business in Asia. He has experienced management teams in place. ANZ's Asian acquisitions have been incremental — mainly strategic footprints. In addition, ANZ is very experienced in the financing of agribusiness and resources, which will stand it in good stead.
ANZ has taken a number of minority positions in Asian-based banks. Surely these minority positions are a waste of money?
This Fool doesn't pretend to know the details or nuances of ANZ's Asian strategy. However Asia is not some amorphous place – it is very diverse and not given to casual presumptions. At present the minority stakes are probably for strategic reasons and a way of getting to know specific situations. A negative with the minority stakes is these have to be deducted from ANZ's Tier 1 capital in order to comply with banking rules.
Australian banks have a hopeless record when expanding offshore. Just look at NAB's (ASX: NAB) experiments in both the US and the UK, which were very costly for shareholders.
Given the geographic/time proximity, the real surprise is that more financial services are not heavily involved with Asia. One successful example is Macquarie Group (ASX: MQG), which quietly developed a broad Asian presence over a decade, and is really the only other major Australian financial to take Asia seriously. Macquarie has over 3,000 staff in Asia contributing 11% of operating income (that excludes Macquarie Capital). Macquarie is the largest foreign asset manager in South Korea and has a significant presence in that country.
NAB acquired the mature US and UK businesses by way of expensive takeover, not business building – and shareholders paid the price.
Foolish takeaway
Of course ANZ is taking a calculated risk by pursuing growth opportunities; isn't this one of the purposes of business? With saturation in the domestic retail banking space and a fragile outlook for housing prices, it is very likely ANZ's differentiation (30% of group revenues offshore by 2017) will be cheered by investors in the longer term.
Interested in our #1 dividend-paying stock? Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."
More reading
- Macquarie moves into the sun
- Westpac popular amongst businesses
- Fighting investors' greatest enemy: overconfidence
Motley Fool contributor Peter Andersen owns shares in Macquarie Group.
