Despite forecasts of above peer growth from Australia and New Zealand Banking Group (ASX: ANZ), investors are growing cautious of its exposure to emerging markets.
When boss Mike Smith launched the bank’s aggressive ‘Super Regional Strategy’ in 2007, he aimed high to achieve success in Asia. However, on numerous occasions, analysts have questioned whether the devotion of time and resources could have been better spent investing in the Australian market.
Due to its exposure in emerging Asian markets the bank is now harder to value and many investors could shy away from Australia’s third-largest financial institution. Since the beginning of 2014 it has fallen over 10% in value, whereas its peers including the Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) have fallen 7%, 7.2% and 8% respectively.
Analysts have become concerned sluggish growth in Asia could have an adverse impact on trading income. According to JP Morgan, ANZ generated $1.6 billion in foreign exchange and fixed income revenues last year. A slowdown could boost FX for the bank in the short run but for many analysts the concern is the long run.
Luckily for ANZ, many of its customers in Asia are located in Hong Kong and Singapore – and 75% of all customers in Asia have investment grade ratings or above. A spokesperson for ANZ said volatility increased demand for the bank’s products and noted its strategy is to focus on trade and capital flows, rather than debt facilities.
Despite the difficulty in valuing Asian operations many bank analysts will have to work harder in coming years as many more financial institutions, such as Macquarie Group Ltd (ASX: MQG), NAB, Westpac and Insurance Australia Group Limited (ASX: IAG), look to capitalise on the potential for growth in the region.
ANZ’s strategy has been aided by non-stop growth in many Asian markets over the past six years, but if regional growth does come to a grinding halt all banks (and the Australian economy) will be hit hard. However, given the unlikeliness of this scenario and ANZ’s relative strength, shareholders can afford to rest easy.
For potential buyers, the recent share price drop in bank stocks has not been enough to convince me they are a standout buy. A ‘wait-and-see’ approach should be exercised until each of the banks release their updated earnings in coming months.