ANZ is leading a big four homecoming this year as oversold Australian banks focus on the businesses they know best, in the place they’re best-known.
Julian Beaumont, investment director at Bennelong Australian Equity Partners (BEAP), told AB+F that while Australia’s expansive major banks have benefitted from the global reflation of the last two quarters, it’s now time to come home and start work on the bottom line.
According to Beaumont, the big four lenders - led by ANZ - are excising lower-returning, foreign assets and focusing on their core domestic businesses amid a growing sentiment that the run is done.
Earlier this month ANZ continued to unwind its “Asia strategy”, announcing the sale of its 20 per cent stake in Shanghai Rural Commercial Bank for A$1.8 billion.
“Well they’re all trying to cut out costs,” Beaumont said at a media briefing yesterday. “And they really do need to after a couple of decades of good revenue growth. They now really need to focus on their cost base and to seek to restructure in a way that reflects a more sanguine growth outlook.
“They’re all trying to do that in their own way, we’ve seen it particularly with ANZ, but now they all need to look at IT spend and projects. They must control their cost base,” he added.
According to Beaumont, six months ago Australian lenders were looking at “pretty weak” earnings with any upside undermined by slow credit growth; potentially bad debts; and greater prudential capital requirements.
“Yet all those headwinds have reduced over the course of that six months, and as a result expectations for earnings have drifted up at the same time against reasonably low valuations,” he said.
“Consequently, they’ve done quite well over that period but they’ve got to a point where the earnings for this year are priced in, helped particularly from that reflation trade globally (which has lifted most banks) and that’s certainly been a happy side consequence for our banks.
“ANZ, in cutting out their Asian businesses, is basically leading a trend to realign bank business back toward the more-profitable, less-risky, Australian-centric businesses."
Beyond their control
ANZ has been stripping its retail assets in Asia since CEO Shayne Elliott replaced Mike Smith in early 2015 and has been refocusing on the business he knows best, putting greater emphasis on institutional customers at home.
“We’ve seen that of course from NAB - they’ve recently cut out Clydesdale - and so now they’re all seeking to come back home, to be more Australian (and to a lesser extent) New Zealand-centric. That is their forward-looking strategy of streamlining to higher return, lower risk, basically.”
Beaumont said banks are subject to their economic environment. Not just credit growth but also the flow of bad debts.
“Also outside their control is prudential regulation. In particular, what’s starting to come through is the capital and liquidity requirements and the downward pressure of prudential requirements," he said.
“There’s a lot beyond their control, so they can push the levers a little bit on some of those issues, but what they do have control around is their cost run.”