Australia's big banks largely escaped the catastrophic effects of the global financial crisis, known colloquially in the country as 'the GFC'. Fairly tight regulation, a resilient domestic housing market and lack of big exposures to the global credit derivatives market certainly helped. As did the concentration of market share in the hands of the 'big four' - ANZ, Commonwealth Bank (CBA), National Australia Bank (NAB) and Westpac.
But there are concerns that the domestic market has now become too concentrated, to the detriment of competition. As market share for everything from retail deposits to home loans and wealth management become dominated by the big four, their options for non-organic growth have also become limited domestically. This has led ANZ to pursue a pan-Asian bank strategy, which began with its acquisition of some of Royal Bank of Scotland's (RBS) assets, and is likely to continue into 2010 given its current acquisitive capital structure.
Mortgage mergers
Within Australia, the number of second tier banks has almost halved during the past 18 months, with CBA acquiring Perth-based Bankwest from troubled UK-based HBOS, and Westpac acquiring its Kogarah-based smaller rival St George for some $17.5bn, both in 2008.
As the financial crisis wrought turmoil in the global financial markets in late 2008, the Australian Competition and Consumer Commission (ACCC), by its own admission, had little choice but to stand by and allow the CBA takeover of Bankwest. But the competition watchdog has since admitted that those deals have dramatically damaged competition in the Australian mortgage sector.
In fact, data published by e-polling and research company CoreData shows that by the end of August the big four banks held 73.8% of outstanding mortgages in Australia, up from 56.8% two years earlier - with CBA and Westpac between them accounting for almost half of the market (48.5%).
Leading non-bank lenders, such as Aussie Home Loans and RAMS Home Loans, have also been acquired or had significant stakes purchased by the big four over the past three years, although these still run as separate brands.
Competition withdrawal
ACCC chairman George Samuel has said publicly that there is less competition in the Australian market after the withdrawal or pull-back of foreign banks that had been active in wholesale mortgage origination through other non-bank lenders. And he has also suggested that the crisis-induced deals for Bankwest and St George may not have been passed at any other time.
"There's even a question you might ask that if Westpac were to seek to acquire St George today, rather than just prior to the financial crisis, whether we'd have the same view we had back then," he told the Australian TV network ABC.
The remaining second tier banks of any significant size - Bank of Queensland, Bank of Adelaide Bendigo and Suncorp - as well as the small number of credit unions and building societies remaining, are all under significant funding pressure that is hindering their ability to compete. With credit ratings now critical to achieving reasonably priced funding in the wholesale markets, and the retail-backed mortgage securities market still very sluggish, their options are limited.
Even though the Australian government introduced a wholesale funding guarantee scheme, it has been criticised for entrenching the power of the big four by charging higher fees for smaller lenders.
Bank of Queensland CEO David Liddy claims that, as a result, net interest margin among the big four was increasing, while all regional banks were seeing a reduction.
The pressure being faced by the small players has fuelled speculation in the market that they are ripe for acquisition. The banking operation of insurance and banking group Suncorp in particular has been highlighted as an acquisition target. But with the ACCC being very cagey about any further retail banking concentration, it is unlikely any of the big four would consider a bid.
Brian Johnson, banking analyst with Credit Lyonnais Securities Asia, an independent brokerage, says it is also unlikely that a foreign bank would consider a move right now, leaving the smaller banks in Australia to struggle on alone.
"Getting a domestic franchise with some retail deposit base is always valuable," he says. "A foreigner with a stronger credit rating can add immediate value because it is cheaper to fund the business. But who has the appetite for that at the moment?
"Look at Rabobank, for example. It is sniffing around the sidelines, but it's really just looking for agricultural financing business, which is its core sector.
"There will come a point in time where you get a Chinese bank looking to expand in Australia, but I don't think that will be for some time yet."
Where foreign banks have been picking up assets in Australia, it has tended to be away from the retail area. Deutsche Bank, for example, is among several banks doing due diligence on the troubled A$16.6bn ($15bn) non-core loan book of Suncorp, which is dominated by property investment loans, development finance and structured corporate loans.
Westpac Bank: mortgage market share
Wealth management
While wealth management in Australia is not as concentrated as mortgages and retail deposits, the big four still dominate through their wealth management brands. CBA owns Colonial First State, NAB owns MLC, and Westpac owns Bankers Trust Financial. These rank first, third and fourth, respectively, in terms of market share of retail funds under management, according to Plan For Life data as of June 2009.
ANZ had a joint-venture partnership with the Dutch financial group ING, marketed as ING Wealth Management, which had the fifth highest market share. But in September 2009, ANZ bought out ING's 51% stake for A$1.76bn as the Dutch bank sought to trim some of its non-core assets to satisfy requirements for assistance from the EU.
"This is a tremendously accretive deal for ANZ," says CLSA's Mr Johnson.
Of the pure-play wealth management and insurance groups with significant market share, AMP and AXA Australia are currently embroiled in their own merger and acquisition processes that are likely to see the country's wealth management and life insurance industry concentrated further.
AXA Asia Pacific is the subject of an $11bn joint takeover proposal from AMP and its parent company, Paris-based AXA SA. AMP would take the Australian operations, while the French operation would get the Asian business of its Australian Securities Exchange-listed subsidiary. The two bidders have agreed to exclusivity until February 2010 when, if a deal has not been agreed, they would be free to invite other partners to bid.
Already there has been much speculation among the Australian media and financial analysts that ANZ might look to get into the deal - either through a counter-bid for AXA Asia Pacific, or even for AMP itself.
And the reason for ANZ's interest? ANZ CEO Mike Smith has a stated strategy of growth through acquisition. Having raised the best part of A$4.7bn in the second half of 2009 from its institutional and retail shareholders, the bank now has quite a war chest.
"It's important to quantify how much it is," says Mr Johnson. "Banks face increasing capital requirements anyway. At CLSA we've always contended that Australian banks need a fully optimised Tier 1 ratio of 9.5%, including all the hybrid capital. This works out to a 7.5% core equity Tier 1. If you take that level of capital, which the banks say is too high but history suggests is the right number, then ANZ has in excess of A$2bn as surplus ordinary equity."
Brian Johnson, banking analyst with Credit Lyonnais Securities Asia
Asian expansion
But Mr Johnson believes that any linkage to AMP/AXA is a coincidence of timing, and that ANZ is much more likely to be focused on its stated aspiration to achieve 20% of earnings from Asia by 2012.
All of the big four have operations or interests in banks outside the Australian and New Zealand markets. NAB still owns Yorkshire Bank and Clydesdale Bank in the UK, and community bank Great Western in the US. Westpac has strong retail operations in several Pacific island nations. And CBA owns Fiji's Colonial National Bank, and has minority stakes in China's Jinan City Commercial Bank and Hangzhou City Commercial Bank.
But ANZ is by far the most expansionary of the big four. Mr Smith, who joined the ANZ in 2007 from HSBC, has well-articulated pan-Asian ambitions. In October, the bank even rebranded its logo with a lotus flower-derived emblem to appeal more to Asian markets.
Last year, ANZ expanded its presence in Indonesia through the October purchase of RBS's Indonesian retail and wealth management assets via its local subsidiary, Panin Bank. The Australian bank plans to be highly aggressive in Indonesia - now the third fastest-growing economy in Asia - going forward, with an ambitious programme to become Indonesia's fourth largest lender by 2012.
After it completes its $600m acquisition of RBS's Asia operations - the Philippines and Vietnam branches have already been completed, with operations in Taiwan, Singapore, Indonesia and Hong Kong to be rolled out by mid-2010 - ANZ will be achieving about 12% of its revenue from its ever-expanding Asia operations.
"There will be certain banks that have assets in the region which may be considered non-core in the current environment [and] we will be watching quite carefully," said Mr Smith at the bank's annual results announcement in October 2009.
To reach its target of 20% of earnings to come from Asia by 2012, ANZ will need to be active in India and China - markets where regulatory approval can be a major challenge. In late November it announced it would inject A$435m into expanding its direct China presence after hopefully securing regulatory approval for a locally incorporated bank by April.
But getting big in Asia for its own sake is not a strategy that all investors are comfortable with. There have been enough calamitous examples of Australian corporates getting burned by global ambitions to keep shareholders wary, say some. But CLSA's Mr Johnson says ANZ's investments in minority stakes and joint ventures in the region to date have held up pretty well.
"Shanghai Rural Commercial Bank has been a fantastic investment [for ANZ]. Its stake in Bank of Tianjin probably hasn't [been a fantastic investment] by comparison. Others, such as the investment in a credit card joint venture with Metro Bank, have been neither bad nor spectacular," he says.
It remains to be seen whether ANZ's focus on high-end retail customers across Asia will help it achieve its growth ambitions. But while there is risk in this approach, it is probably more attractive to management than slugging it out at home stealing percentage points of market share from other members of the big four.
