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Banks in $US18.5 billion retreat from Asia

Clancy Yeates
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Australian banks have cut their lending to key Asian economies by $US18.5 billion in the past two years, responding to investor pressure to ditch lower-returning assets and focus on their core domestic businesses.

Investors have generally backed the pullback, led by ANZ Bank winding back its "super-regional" strategy, including its announcement on Tuesday that it would sell its 20 per cent stake in Shanghai Rural Commercial Bank for $1.8 billion. 

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In what is seen as a challenging time for banks, ANZ has posted weak results, including some 'bad debt'. Vision courtesy ABC News 24

But the shift does raise the question of whether the closer focus on Australia could intensify domestic competition, squeezing returns.

Since late 2014, the Australian banks' exposure to key markets including China, India, Singapore and Hong Kong has dropped, shows BusinessDay analysis of Bank for International Settlements data.

The only major Asian markets where banks have grown their loan books since late 2014 are the developed economies of Japan and South Korea, but these gains were easily outweighed by falls elsewhere in the region.

Loans to China have fallen from $US35.5 billion in late 2014 to $US27.8 billion at June this year, the latest period available. Exposure to Singapore has fallen by a similar about $US7.4 billion, while Hong Kong's is down $US5 billion, and India is down by $US1 billion.

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With Indonesia and Vietnam also down, the net result is a $US18.5 billion fall in loans held in all of these countries.

While the banks' Asia portfolios are still relatively small, the change contrasts with several years ago when all the major banks, most obviously ANZ, were keenly promoting their Asian strategies, which mainly focused on institutional business.

The chief executives of the four major banks even travelled with then Prime Minister Tony Abbott when he announced free trade deals with Japan and Korea.

Since then, tougher capital rules, narrowing profit margins, and a slowing Chinese economy have forced banks to take a harder look at which businesses are generating the best returns, and ditch those not up to scratch.

Intense competition from global banks

Principal at fund manager Alphinity, Andrew Martin, explains the pull-back by saying that in a world of tougher capital requirements – which lower bank profitability – boards will have less tolerance for putting capital into low-returning businesses.

"What they've found, particularly in institutional banking and markets and FX, is that the competition was pretty intense. Every man and his dog wanted to be in the high growth region in the world," Mr Martin said.

For ANZ, which sold retail banking and wealth businesses in five Asian nations in November, the market reaction has been positive.

In the past year, ANZ has provided the best total returns of the big four, with a return of just under 11 per cent including dividends and price changes, even though it was the only big bank to cut its dividend.

Even so, other bank watchers say the lenders will continue to be attracted to Asia-linked growth due to the huge amount of economic activity in the region.

It has been estimated that the number of middle class consumers in the region will balloon six fold to 3.2 billion by 2030. That sheer growth potential will lure all sorts of businesses, including banks.

All of the local banks also continue to target institutional banking – taking a cut from booming trade and investment flows.

PwC's banking leader, Colin Heath, says that with bank profit growth also slowing in Australia's domestic market, the potential profits from the region will be too big to ignore.

"The returns in the domestic market are also facing increasing challenges for a variety of reasons as well. So I do think those profit pools in the region have to form a very important part of growth strategies growing forward – it's too big to ignore," Heath says.

"Banking trade and capital flows is a critical part of the value proposition for Australian customers into the region and for customers inbound to Australia from the region, so I wouldn't see any reduction in focus on that."

He says it is not clear if the Australian banks' exposure to Asia may rise or fall in the future, as the industry is forced to think harder about where it can compete.

'No competitive advantage' in retail banking

ANZ's chief Shayne Elliott makes a similar point about the need for banks to be more targeted. After selling off the bank's key Asian retail banking businesses in November, later that month he said the economic rise of Asia was no reason to open a bank there, as ANZ had "no competitive advantage" in retail banking in Asia.

"Just turning up in those markets and having a go is a terrible idea, because the returns are really really low, and the local banks will kill us. So you've got to have an edge", Elliott said at an event in Sydney.

"We should focus on things that we do better than anybody else, strategy is about winning and you have to figure out where you can win. And we just said look, somebody else will win there, our job is to win in retail and commercial in Australia and New Zealand, and institutional banking in the region."

Yet potential challenges are also created by the banks focusing more on their domestic cores. In particular, some of Elliott's key rivals are thinking the same thing.

National Australia Bank has also sold underperforming businesses overseas with a vow to plough more capital into its "heartland" of domestic and New Zealand small business and retail banking. Commonwealth Bank and Westpac are already skewed towards retail banking here and across the Tasman.

Profit margins have already fallen to their lowest levels on record. Some believe this heightened focus on the local market could exert a further squeeze on profitability.

"They are all looking at return on equity, they are trying to put their limited capital into the parts of the market that have highest returns," Alphinity's Martin says. "What that means is more competition."

As the local banks double down on the domestic market after shedding assets overseas, a key question in 2017 will be how this affects the intensity of competition in domestic retail banking.