Is Asia the Panacea to Limited Growth in Australia for the Big Four Banks?

Josh Hawkins April 11, 20134 mins read

The big four Australian banks are struggling to achieve real growth in oligopolistic market conditions; essentially swapping institutional clients and chasing limited deposit and lending growth opportunities.

That means that they need to look further afield to try to achieve analyst pleasing 5-7% year on year growth. NAB’s failed European adventure (Clydesdale Bank and Yorkshire Building Society) has highlighted, more than anything else, that cross-border global banking is the solution with Asia and the Asian Dollar the emerald city end goal.  However the four banks have adopted similar but divergent strategies in order to achieve this. Broadly speaking, all four banks have realised that institutional banking and markets businesses are the easy way in.

ANZ, CBA, Westpac and NAB have representation in Singapore, Hong Kong and China however, institutional and investment banking is volatile, capital intensive under Pillar 3 and made more difficult by Dodd-Frank. Institutional banking is also highly competitive with all of the major global banks chasing the same, albeit expanding, slice of pie.

Australian banks, excluding ANZ, have a lack of credentials in the global IB market. Morgan Stanley, JP Morgan, UBS, Deutsche Bank, Credit Suisse and Goldman Sachs etc are established players with the capital, reputation, truly global footprint and distribution channels to support continued growth in Asia. The indigenous banks add another dimension to the competition in the market; banks that already have deep established relationships with domestic institutions of which many of the largest in China are government owned. That combined with Australian commerce’s relatively small foot print and competition for Asian investors mean that it is the retail market that offers our banks the opportunity to outshine their international competitors.

Australian banks, of which only one – CBA – is in the top 10, also suffer from a lack of depth and experience in the market. HSBC and Standard Chartered Bank have strong deep relationships with China’s government, both local and central; meaning that they have a level of access that the Australian banks can only dream of.

Interestingly, it was announced yesterday that ANZ and Westpac have just been granted the ability to directly convert AUD to Yuan removing the need to first convert AUD to USD then Yuan which will help to facilitate trade and increase margins by reducing costs.

One way in which the Australian banks have tried to overcome their lack of depth in the Asian market is through the JV model, buying stakes in local institutions in order to capitalise on their existing customer base and distribution channels. ANZ and CBA have been successful in this endeavour while NAB has chosen to focus on trying to augment their local institutional banking offering with providing access to asset and project finance opportunities in Australia. NAB recently claimed to be facilitating AU$30bn of investment although they haven’t disclosed their margins. Westpac has attempted to go down the JV route but has not been successful to date, recently failing in their attempt to buy a $400million, 5% stake in the Bank of East Asia, one of the local banks in Hong Kong.
The JV model has many inherent risks specifically in China. In China the lack of intellectual property rights and government protectionism mean that the Australian banks could be left high and dry should the Chinese institutions decide that they have no further need of the expertise that the Australian banks provide to them.

The expansion of Australian banks’ retail banking, wealth management and retail insurance divisions represent an opportunity for our banks to make inroads into the Asian market. Australia’s ever closer economic ties, geographic proximity and the countries of origin of its immigrant population provide a unique opportunity for their banks to shine. Retail and Wealth offer the opportunity to increase market penetration and brand awareness which will in turn result in positive growth in their more lucrative institutional banking divisions. Both ANZ and CBA are pursuing this strategy while NAB and Westpac are approaching Asia with a different strategy.

Over the next few weeks, these similar yet divergent strategies will be explored bank by bank followed by a comparison and analysis of the strengths, weaknesses, risks and opportunities that are and will be afforded to the leading Australian banking groups.

Josh Hawkins's picture
Associate Manager | Accounting & Finance - Commerce & Industry (Contract)
jhawkins@morganmckinley.com.au