Shareholders will have mixed feelings about the departure of Australia and New Zealand Banking Group's (ASX: ANZ) chief executive Mike Smith with the stock wallowing around a more than two-year low.
Smith's Asian expansion strategy is the key reason why the stock is the worst performing Big Bank stock over the past year, in my opinion, with a 13% drop compared with the Commonwealth Bank of Australia's (ASX: CBA) 3% loss and the 7% drop in Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB).
Smith's key mandate when he was brought in from HSBC in October 2007 was to transform ANZ Bank into an Asian banking powerhouse but the bank is still far from reaching that goal.
This was always meant to be a multi-year strategy but ANZ Bank doesn't really have much to show for the effort as it remains a minor player in the region with its exposure to Asia actually reversing recently as the bank had to sell its investments to shore up its balance sheet.
It isn't all Smith's fault of course. Asia represented the fastest growing economies in the world thanks to China. Now that part of the world could be the slowest – no thanks to China as economic growth in the country slows sharply.
Smith's grand plans may yet pay off over the long-term, but I suspect it will continue to be a drag over the short to medium term because I doubt ANZ Bank can continue to pursue its Asian ambitions in this climate of limited bank liquidity.
Global banking regulators are forcing banks to increase the proportion of cash and liquid assets they hold compared to loans. This leaves the banks with limited free liquidity to expand their business, particularly offshore due to the higher risks of such a strategy and unfavourable exchange rates.
This is a time for the banks to batten down the hatches – not stick their necks out – because investors aren't buying bank stocks for growth but for dividends.
As my colleague Mike King wrote, the yields for the Big Four are getting hard to ignore with the stocks generating yields of around 8-9% if you include franking credits.
Focusing on their domestic business to ensure their dividends are sustainable (they don't even need to grow to remain in investors' good books!) should be a priority now and this is why NAB has been one of my favorite picks in the sector as it sold its US business and is close to divesting its UK-based Clydesdale Bank.
There are risks around bank earnings and their dividends but that's mainly based on the premise that Australia will slip into a recession.
I think we can escape the contraction – at least for the next six to 12 months – and I see good value in bank stocks.
The only bank I do not own is ANZ Bank as I think it is too early to buy the stock. I would wait for Asian economies, particularly China, to stabilise before changing my view on the stock.
