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Will look at M&A opportunities as and when they occur

Will look at M&A opportunities as and when they occur
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First Published: Wed, Sep 14 2011. 11 27 PM IST

Key role: Michael Smith says that as ANZ’s strategy unwinds, India will be its pivotal point and a critical market in which it has to operate. Abhijit Bhatlekar/Mint
Key role: Michael Smith says that as ANZ’s strategy unwinds, India will be its pivotal point and a critical market in which it has to operate. Abhijit Bhatlekar/Mint
Updated: Wed, Sep 14 2011. 11 27 PM IST
Mumbai: Australia and New Zealand Banking Group Ltd(ANZ) opened its first branch in Mumbai this week, marking its re-entry into India 11 years after it sold its business to Standard Chartered Plc.
ANZ plans to focus on institutional and high-end corporate businesses, chief executive Michael Smith said in an interview. Retail banking will come later and the bank will operate in a “very, very niche market”, he said.
ANZ’s India strategy is based on organic growth, but it will also explore mergers and acquisitions (M&A), Smith said. Edited excerpts:
Why are you back in India?
Key role: Michael Smith says that as ANZ’s strategy unwinds, India will be its pivotal point and a critical market in which it has to operate. Abhijit Bhatlekar/Mint
India is a critical part of our strategy. In the last three-and-a-half years, we have embarked on creating a super regional bank, and I think the importance of the links between Australia and New Zealand and the rest of the region is becoming far more apparent now than they were 10 years ago.
As the strategy unwinds, obviously India is going to be its pivotal point... It’s a critical market in which we have to operate.
What will you do here?
We will do normal banking—starting with institutional banking, concentrating on trade and investment flows not only between India and Australia, which are growing all the time, but also the inter-regional connections and financing those activities. We already have a significant number of Indian clients and have been managing them out of other centres around the group, but it is very important that we get the proper coverage back into India.
Tell us about your “super regional” strategy. By 2017, you want Asia to contribute one-third to your profit.
It’s based very much on the common-sense dynamic of trade and investment within the region. If we look back, over the last 20 years, we have seen a gradual shift of economic power from the West to the East and from OECD (Organisation for Economic Co-operation and Development) to developing markets, and that is continuing. The global financial crisis of 2008 increased that momentum. We are in a new era where Asia is going to be the dominant growth story of the century and, therefore, it is absolutely essential that the region have strong banks.
Australia, by its physical presence and also by its natural resource benefits, is linked to the region in many ways other than just its proximity. So it made sense to have a regional bank which is based in Australia and has got the OECD benefits.
You said new targets were based on expansion, and prudent and opportunistic M&A strategy. What does this mean in the Indian context?
Organic growth is much easier to control and it costs you one time book, which goes down well with the market because there is no premium. I think you have to be open to the opportunity of M&As, but the key is to maintain the discipline around the deal, and that discipline for us means three things. First, the price has to be somehow accretive to shareholders in the medium term. It has to get you to a place that organic growth would take much longer. The second, it has to fit into the framework of your strategic thinking. The third, perhaps the most important thing, is that you have to have the execution capability. Our strategy for India is based on organic growth. We will build steadily in terms of making sure the infrastructure required and the necessary support and control. I think you also got to remember that we have much of our operation support for the 32 countries in the group and the IT(information technology) support in Bangalore. We have 5,200 people in Bangalore supporting other aspects of the group. So we already have a centre of excellence within India, but obviously we will look at M&A opportunities as and when they occur.
You had a very large network of 29 branches across 15 cities. Do you regret selling the India business?
I don’t regret (it) because I wasn’t here, but I regret not having it.
What kind of branch network are you looking at?
I think we just have to take that as it comes. There are some proposed regulatory changes being discussed at present and it will depend on how that evolves. We are very careful about compliance with local regulation.
Also it depends on how business grows. Obviously, we would want to berepresented in the major cities and certainly follow our customer base in terms of the trade flow, investment flows that we are seeing, and indeed our major industries in the institutional bank, which are natural resources, agriculture and infrastructure. It makes sense to cover those aspects within the country, but (I) don’t have a number in my head, not really.
What will be the main building blocks of your business in India?
First, we will concentrate on the institutional side and high- end corporate side. The second phase will be to obviously look further down the supply chain into the middle market, and that’s something that we would be keen on developing in time. But actually getting through and really supporting the whole trade line is very important to us and, of course, the mid and small corporates who are supporting the larger corporates in the supply chain are equally important to us. And, as I say, that build-up will have to come after we get the critical mass of an institutional bank
What kind of critical mass?
I would think that within two years, we would really have the critical mass the way we are going at the moment. But you can’t look at the numbers as Indian corporates because you also got to look at multinational corporates and Asian corporates who are doing business in India. It also depends on the size, if you have one BHP or one Tata group or whatever...I think we should aim to have at least a thousand major corporate relationships.
Does retail banking figure in your scheme of things?
It will be the third phase of the development, and I think it will have to be very specific around a very, very niche market. Can we take on State Bank of India, ICICI Bank? Of course we can’t and it would be silly to try and do that. We can probably support a very niche business in the affluent sector and those people who have a connection with Australia—may be a migrant connection, a working connection, an education connection or indeed an investment connection, and at some stage we would look to develop that.
When will the third phase start?
We will move fairly fast. I like to see a return from the business, andthe quicker that return comes, the more capital I would give them. Is there a limit to that capital? That depends on how fast the business grows. Everybody is vying for capital around the group, and if we can make a better return from here than anywhere else, then it will get more capital.
To start with, how much capital are you bringing in?
That’s based on the regulatory requirements, which will depend on whether or not there will be a local incorporation, but we will put as much capital as we need, as is necessary
Are you comfortable with local incorporation?
It doesn’t worry me too much. In many of the countries that we operate, we locally incorporate. I think there has been a regulatory push to encourage local incorporation, and from a regulator’s point of view I can understand that it’s a little easier to get your hands around something that is locally incorporated. The biggest problem is that as a subsidiary, things like ratings are harder and, of course, your home regulator is very reluctant to allow you to guarantee subsidiaries, so there are some issues around how they are managed.
We must also remember that Australia was one of the first countries that insisted on local incorporation for banks, so it would be somewhat strange for me to say that it shouldn’t be necessary for anyone else.
You’re coming at a time when India is ready to allow a new set of private banks. They will be more technology-savvy and will intensify competition.How do you look at this?
That’s just a global phenomenon. We are in a time when technology is playing an ever-increasing part in our industry. Banks are perhaps one of the most technologically dependent industries in the world. And I think companies like Appleand Googlewould like to get into financial services, and that is something we have to be very aware of, and it is good for us because it does push us in terms of introducing new technology. Competition is a good thing generally. I don’t like it so much when it squeezes margin, but that’s the name of the game.
How are you going to be different from other foreign banks in India?
In terms of the comparative advantage, I think we have one obvious one—the connection with Australia. There are other banks that are connected to Australia but not in a way that we are. That is quite clearly one advantage. In terms of other advantages, it’s harder to articulate. Because, really, financial services are very commoditized and I think it’s a question of how you service, how you attend your client base. We are still very much a relationship-based bank in terms of our model, and that is very important. In Asia, that plays very well into the business community
There are other banks that have the same model, but there are banks that have a very transactional model, particularly the Western banks. Do I say that we have a unique advantage? No, we don’t with the exception of the link to Australia. We also bring an expertise in natural resources, agriculture and infrastructure, which is quite unique. We are one of the largest banks in the world in terms of these industries. You are harping on your relationship with Australia, but as a brand Australia has taken a beating because of a few racist incidents in the recent past.
Relationships have their ups and downs, and we all know that. I certainly do, being married for 30 years. You have some good times and sometimes not so good. But the depth of a relationship is what is important. The depth of the relationship between India and Australia is still very significant
And if you look at the growth of trade between India and Australia, it’s already No. 4; it was No. 10 five years ago. So, that growth is huge. Investment, both ways, is at an all-time high. If you look at migration, it’s still very positive
Is the banking crisis over?
I won’t say the banking crisis is over; I think the first phase of the banking crisis is over. The phase of 2008, that has passed, and I think some countries reacted better than others. The US probably got its banking system back into shape in a better way than the Europeans did.
What we are now seeing is somewhat ironic actually. Now we have a sovereign debt crisis and we can all understand why. It’s like our own household finances, when we borrow too much, you default on the interest or the payment, and you have got a problem.
Looking forward, the European problem is aggravated as under the new regulation imposed by Basel III, banks have to hold sovereign papers as their only source of liquidity. It’s a crazy situation. In Europe, these banks have to hold sovereign papers, so they are now affected by the sovereign crisis. And until there is some form of restructuring for Europe, particularly southern European countries, this problem is going to get worse. And the effect of that in the rest of the world is the instability of the debt market. That creates a lack of confidence in the investor community at large. So the knock-on effect in equity markets as well. But it’s the debt markets that worry me.
In the first half of the year, ANZ’s margin is under pressure, credit growth is slowing. What is the outlook?
I can’t give you a number. In terms of the Australian economy, growth has slowed a little. It has slowed a little in the resources sector, but in the traditional economy, it’s been quite slow. I think we will see a slower level of growth than what we saw pre-crisis. That’s no surprise.
That’s why the super-regional strategy makes more sense because we are looking for the upside out of Asia, not out of Australia. Actually, the margin has continued to improve. What you saw was the gross margin of the group, which included market. If you take out the global markets business, margins continue to have slightly increased. So that reflects a better risk pricing that we have been able to do since the crisis. I am actually much more confident about next year than many of my colleagues in other banks.
You are coming to India at a time when inflation is high and growth is slowing. Do these things worry you?
This is part of the dynamics and the reality of any economy where we operate. The fact that growth is now slowing is a result of increase in interest rates fairly fast as an attempt to reduce inflation. So we are beginning to see inflation actually slow down in India; the corollary is that the growth will slow little bit. But in terms of what the RBI(Reserve Bank of India) is trying to achieve, it seems to be working. The question, and it’s a hard one for central banks, (is) is that balanced?
How difficult it is to get talent in the Indian market, because wage inflation is pretty high? Are you poaching from other foreign banks?
On the basis that we don’t have staff, obviously, we have to get them from somewhere. If they have good experience with other banks, we will be looking for them. So far, we have had no problem in attracting talent. Our name is a good one and, of course, we do have a history in India. I think around the region it is going to be an issue. But I suspect some of the regulatory changes that are coming into force in the UK, for example, and other parts of Europe, that are actually going to create an opportunity for financial countries like Singapore and Hong Kong. We are going to see more people coming out in the region—global people, and India is going to be a beneficiary of that too, I suspect.
After you have taken over the reins, more women are coming on the top.
I look at this as a business proposal. And it’s not just a gender balance; it’s diversity overall. I think you should look at it as a business advantage. If you have a very diverse organization, you actually can appeal to different market sectors. And actually support them much better. Half of our customers are women. We should be looking after them better than we do.
tamal.b@livemint.com
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First Published: Wed, Sep 14 2011. 11 27 PM IST