It would appear the ANZ Bank wants to be more than a bank.
Judging by the tone of commentary from the bank in its interim results and briefings this week, it looks like the bank wants to go shopping and use its surplus capital to buy non-bank businesses rather than give it back to shareholders.
It’s all linked to a significant rejig of the bank’s operating structure – introducing a listed, non-operational holding company with the existing bank under it and a second group of (presently small) non-banking assets that is where the spending will be concentrated.
The bank said in the ASX presentation on its earnings on the restructure “would provide ANZ with greater flexibility to create additional shareholder value”.
ANZ said in the news release that it “is considering options for the best use of capital, including investing in additional growth opportunities or returning any capital excess to its regulatory requirements to shareholders. ANZ will update the market on any decisions in a timely manner,” the bank said in the earnings release to the ASX.
In the usual half year prepared internal interview CEO Shayne Elliott revealed that the bank had called off its regular buybacks that had returned $5.5 billion to shareholders over the past five years.
Elliott added “Capital management, I think, has been really part of the DNA of ANZ over the last five or six years. We’ve been really mindful that we are the custodian of our shareholders’ capital and I think we’ve been extraordinarily prudent with that. We just completed our most recent – we led the market actually in capital management as a theme,” Mr Elliott said in the inhouse interview.
“…the whole world is changing, everything is flipping around, it’s really uncertain. And we sort of sat back and said, ‘we’ve got capital, we’ve got a lot, we could continue on the buyback, but let’s just take time out here and just think about the future, think about what’s going on and not be bound by the tyranny of an announcement day – we just happened to have our financial results today – let’s be thoughtful like we have been over the last five or six years and consider what the opportunities are going to be’.
“Because in that new world is also going to be a whole bunch of new opportunities. So, we are just taking a bit of a pause and that doesn’t mean we can’t change our mind tomorrow or next week or in three months or six months. But it’s just not something we are going to talk about today.”
With capital of $84 billion and a CETI ratio of 11.5% (that’s the highest quality capital) at March 31 the ANZ could have a couple of billion dollars to spend over the next couple of years if it wants to keep its CETI capital well above the 10.5% minimum that regulators demand.
That will also see the bank conserve dividends – its why the interim was 72 cents a share or a 57% payout when it could have easily been raised to 75 cents a share.
That likely means no more buybacks for shareholders and a lid on dividends, funds the bank now wants to spend on itself.
To expand outside banking, the ANZ needs a structure that will separate its highly regulated banking business from the more lightly overseen non-banking operations.
As the bank said in the earnings release the non-operational holding company set up will allow it to “create distinct banking and non-banking groups within the organisation.”
The listed parent holding company will hold a “Banking Group” – the current Australia and New Zealand Banking Group Limited and the majority of its present-day subsidiaries.
The other ‘Non-Banking Group’ “would allow banking-adjacent businesses to be developed or acquired to help bring the best new technology and non-bank services to our customers. The majority of ANZ’s 1835i investments (they are small stakes in a host of financial sector start-ups) and similar holdings would move to the Non-Banking Group.”
“Under this new structure there will be no impact on customers and no change to how ANZ’s banking operations are regulated,” the bank said in this week’s statement.
In the in-house interview, CEO Elliott said the NOHC arrangement (non-operating holding company) will allow the bank to add various non-banking business to its banking operations to help customers.
“A good example is the business we bought recently called Cashrewards. Cashrewards actually just helps people save money when they’re going about their daily purchases. It’s a great thing for customers, improves their financial wellbeing but it’s not banking.
“[…] having a business like that sit within a banking group and subject to the same regulation as, say for example, our home loan business doesn’t really make a lot of sense. And what it does is it slows you down. And it imposes a level of structure and infrastructure and compliance on a business that really isn’t helpful.
“And so basically what we’re going to do is, if we’re approved, we’ll have a holding company – ANZ Group – and it’ll have a couple of subsidiaries under it; it will have a banking group that looks like ANZ today and will go about doing what it is and it will continue to be regulated just the same way it is today.
“…there’ll be this non-banking group and that’s really in a vehicle that – certainly in the early days – will be relatively small and modest. But allows us things like Cashrewards, it will give them an appropriate home and a way to run those.”
It should also allow greater flexibility in terms of speed of buying and selling assets and the type of businesses that can be bought or invested in. A new method of organising payments, a new way of transacting (the ANZ’s emerging online platform for example called ANZ Plus) or a buy now pay later operation.
It is hard to see APRA or the Reserve Bank or ASIC falling for the new structure to allow the bank to expand into more lightly regulated businesses without making it clear to the ANZ that regulation will continue via intense oversight.
Yes, there will be businesses that don’t call for CETI capital to support them, need stable funding ratios and the capital to back them or a different system of valuation and marking them to market every six months and then making a pre-emptive provision if the outlook for the sector looks a bit dicey (as banks have to do with housing, business lending and the like, as we saw in the pandemic in 2021).
But you can bet that the regulators won’t allow a repeat of what we saw in the GFC or the bank crashes of the early 1990’s and all those loans to brokers, investors and investment banks, property deals, dodgy development companies and others that soured.
The ANZ has form in this area and at one stage in the early 1990’s was regarded as the second sickest bank after Westpac.
The big four banks have had a lot of unfortunate experience with non-bank financial subsidiaries and associated businesses such as finance companies which moved from personal finance to property and land dealings and went bust, had to be bailed out and nearly caused their parent’s failure.
ANZ’s finance company was Esanda. It became a subsidiary of the ANZ in 1987, sort of missed being hurt by the banking and finance collapses in the recession of the early 1990’s and limped on for decades financing car purchases and leasing deals before the name was “retired” in 2019.
It’s interesting to note that Macquarie’s structure is long-standing and yet its only now that a major bank is looking to emulate it. You’d be entitled to ask why now?
The proposed revamp is more interesting than the flat profit for the March half year.
The change suggests that ANZ is looking to try and put a bit of oomph into its performance and, over time, source earnings from outside the regulated banking system. So watch for a big PR campaign for the structural change and less on the usual lending, now that home loan costs are rising (which is always ‘bad news’ for a bank).
