ANZ's Asia strategy in focus as CEO heads for retirement

SYDNEY (REUTERS) - Australia and New Zealand Banking Group is pushing harder into the lucrative mortgage market at home, rekindling speculation Australia's No.4 lender will retreat from Asia once CEO Mike Smith, the strategy's main architect, exits the scene.

The only major Australian bank that focuses on Asia had the largest single market share of new Australian home loans in August for a second month, according to AFG Competition Index, beating Commonwealth Bank, the country's No.1 mortgage lender.

But while ANZ is ranked No.5 for arranging loans in Asia Pacific ex-Japan so far this year, it falls to ninth place when Australia is excluded, according to Thomson Reuters data.

"Their Asia strategy needs to be reassessed - if they need to be there and at what size and if you decide to withdraw how do you go about it," said Omkar Joshi, who helps oversee about A$1 billion at Watermark Funds Management Pty Ltd.

An ANZ spokesman said the bank was shifting the emphasis of its business in Asia "somewhat from growth to improved returns", although it remained committed to the region. Indeed, the bank said it had just opened a new branch in China.

Mr Smith, who kick-started the bank's "super regional" strategy in 2007, said earlier this month he would hang up his boots "within the year".

If ANZ were to retreat to the domestic sphere it would join a growing number of mid-sized lenders including ING, RBS and Societe Generale that are scaling back operations in Asia after failing to reach critical mass.

Like ANZ, they pushed into Asia attracted by the region's growth projections, but had to retreat due to cut-throat competition, lack of local expertise and low margins.

Mr Smith, who previously led HSBC Holdings in Asia, has consistently endorsed ANZ's Asia strategy. In August he told investors that growth from Asia was offsetting a "generally difficult operating environment in Australia".

Still, investors have not embraced the strategy due to concerns Asia is distracting from the more profitable Australian home lending business. China's recent market turmoil has further added to concerns about risk in the region.

ANZ shares are the worst performers of the "Big Four" Australian banks this year - down nearly 14 per cent.

ANZ has invested in 15 Asian countries where it focuses on cash management, foreign exchange and debt capital markets. It lacks scale in China, something that has protected it from recent market jitters there but could impact its longer term growth in the region.

Some analysts have begun to question its ability to meet its goal to garner 25-30 per cent of profit from outside Australia by 2017 compared with 20 perc ent now, and notch up 16 percent in return on equity (ROE) by 2016 from 15 per cent currently.

ANZ has a return on risk weighted assets (RoRW) of 2.84 per cent in Australia compared with 0.81 per cent in Asia, excluding its minority partnerships which it is looking to exit. The Asian RoRW translates to a level of profitability below the cost of capital, meaning the bank is destroying value.

Its cost-to-income ratio is 44.7 per cent, higher than its three main rivals - CBA, National Australia Bank and Westpac - and compared with 36.7 per cent at its Australian franchise, reflecting high costs in Asia.

"Where we are concerned is it's so competitive out there in Asia that ROE will be diluted by the Asian strategy," said a Melbourne-based investor at a firm which owns ANZ shares. "I won't blame Smith, but it will all come down to the board whether they have lost interest in the strategy or not."

An ANZ executive said all eyes would be on the board's choice of Smith's replacement.

"If the new CEO is more Australian-centric that would say it all," said the executive, requesting anonymity because they were not authorised to speak on the matter.