ANZ Bank Finds Growth in Asia

After Australia & New Zealand Banking Group Ltd's (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) blockbuster earnings, the other members of Australian banking's Big Four may consider revisiting their relative insularity.

That's because ANZ Bank's aggressive push into Asia helped deliver an 11 percent year-over-year surge in earnings, which fueled a 14 percent jump in the firm's dividend. The bank's interim dividend is a fully franked AUD0.83 per share, with an ex-date of May 9 and a payment date of July 1.

Unlike its peers Commonwealth Bank of Australia Ltd (ASX: CBA, OTC: CBAUF), National Australia Bank Ltd (ASX: NAB, OTC: NAUBF) and Westpac Banking Corp Ltd (ASX: WBC, NYSE: WBK), which have been largely content to dominate the domestic market, ANZ has adopted a super-regional strategy whereby it hopes to augment core earnings from its home market with the hyper-growth from nearby Asian markets.

In fact, this strategy is what originally won CEO Michael Smith his current post. Back in 2007, Mr. Smith, who was with HSBC at the time, gave a presentation on how he would grow ANZ across Asia, transforming it into an entity that would rival his then-current employer. ANZ's board was so impressed, they hired him as CEO.

Of course, this strategy has encountered considerable skepticism, particularly as its rollout has been more challenging than expected, with the timeline for profit targets extended, as international results fell short of ambitious projections. The new goal is for ANZ's Asia Pacific, Europe and America (APEA) segment to deliver 30 percent of the bank's profits by 2017.

Analysts believe the customarily cautious bank will have to pursue more bolt-on acquisitions to achieve this new target. The bank did go on a bit of an acquisition spree in the Asia-Pacific region in 2009-10, though the extremely disciplined acquirer has largely kept its powder dry since then, despite a numb! er of other high-profile opportunities.

For fiscal-year 2013 (ended Sept. 30), the APEA segment accounted for 15.6 percent of cash profit, or AUD1.015 billion, its share declining nine-tenths of a percentage point from the prior year. For the first half of fiscal 2014 (ended March 31), by contrast, cash profit from the APEA division was up 48.4 percent from the prior-year period, to AUD681 million. That amounts to 19.4 percent of the bank's overall cash profit, an improvement of 1.9 percentage points from the prior year.

Management observed that its international business, particularly in Asia, is "firing on all cylinders" due to significant growth in customers, products and investment flows. Furthermore, Mr. Smith noted, "Since we launched our strategy six years ago, the compound annual growth rate in earnings from Asia has been 37 percent, and ANZ is now being consistently rated a top 4 corporate bank in Asia by Greenwich Associates."

One of the key sources of the bank’s Asian profit growth was its Global Markets business, which provides services in areas such as commodities and foreign exchange. Income from customer services in Asia, particularly foreign exchange, increased by 34 percent.

Despite these promising results, ANZ does not publish its return on equity from its Asian operations, so it’s difficult for analysts to compare returns from its investment in Asia to the returns it typically generates at home. Presumably, that means its Australian business is still delivering better results in this area than its Asia-Pacific operations.

In the past, analysts have leveled substantial criticism toward the bank's foray into Asia. In a three-part report last October, for instance, JP Morgan said ANZ's returns had lagged its domestic-focused peers over the preceding six-year period, observing that the supposedly growthier APEA division's earnings were essentially treading water, even though the segment's capital base had grown significantly.

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What m! ight be different now? Perhaps the segment is benefitting from the recent decline in the exchange rate. The APEA division reports its earnings in US dollars, and the Australian dollar traded at an average of USD0.9125 during the half-year period, down 12.1 percent from the prior-year period's average.

The bank does hedge some of its currency exposure, though there was still a positive 9.7 percent difference in APEA earnings when results were translated back into Australian dollars.

Mr. Smith has frequently argued that Asia's higher growth rates are a better long-term bet than the superior returns that Australian operations will yield in the short term. Regardless of its growing pains, ANZ’s overall return on assets remained steady at 15.5 percent.

And in a period during which the aussie is expected to enter a protracted decline, perhaps the bank's super-regional strategy has benefits beyond the heady growth expected from Asian markets.