Banker on the money with forecast

THIS time last year, after a strong asset price recovery, ANZ Bank chief executive Mike Smith warned the global financial crisis was not over.

Smith’s prediction of a series of aftershocks lasting up to five years now looks like it’s on the money, as Europe’s debt crisis rolls through Ireland, Greece and Portugal, and potentially on to Spain and Italy.

Australia, happily hitched to fast-growing Asia, stands to one side, although ANZ is not immune to the threat of volatile funding markets or, indeed, the smorgasbord of regional opportunities presented by a stressed global banking system.

“I think instability in the markets is going to be an issue in 2011, particularly for the credit markets,” Smith says in an exclusive interview with The Weekend Australian.

“Equity markets might not be as bad because they’re getting used to this kind of aftershock, but every time it happens to the credit markets they get whacked.

“The cost of wholesale funding is clearly going to be an issue for Australian banks.”

So get set for another round of sabre-rattling in Canberra, as banks pass on their higher costs to customers in the form of out-of-cycle rate rises.

Bank-bashing will only intensify ahead of the March 31 release of a report by the Senate committee investigating the sector’s competitiveness.

Volatility, though, also presents an opportunity for acquisition-hungry ANZ.

Smith firmly believes the European debt crisis has only just begun and will “get ugly before it gets any better”.

He says Portugal and Spain will have to confront their own versions of the mess that led to Ireland’s E85 billion ($108bn) bailout by the European Union and the International Monetary Fund.

As for Greece, it was destined to “come back to the party”, because there was no sign of the required structural changes to rectify the situation.

The opportunities for ANZ become clear when you overlay a capital-lite European banking system, which is already holding too much impaired sovereign debt, with the tighter rules for bank balance sheets under the so-called Basel III process.

It was a similar level of pressure that enabled ANZ to pick up select Royal Bank of Scotland assets in Asia for $US550 million in 2009.

“I think there will be another call for capital if there’s a haircut on these bonds, and why shouldn’t there be?” Smith says. “Somebody’s got to take some pain if you reschedule a country’s debt and I suspect it will be the banks, which means there will be pressure on them to divest businesses which are not domestic.

“Taxpayers will be saying: ‘We’ve poured all this money into you guys and you’re not providing enough oxygen for the domestic economy’. I think this theme is going to be running for a couple of years, and it’s going to throw up a few opportunities for us.”

Smith, though, says the only caveat is what happens to prices.

Over the past few years, ANZ has enjoyed a relatively free run at regional M&A, as one of the few global banks with the inclination as well as the balance sheet to build a meaningful Asian presence. Through this period, according to Smith, ANZ was able to offer some “cheeky prices”.

But it won’t always enjoy that luxury and must maintain its financial discipline or risk losing market support for the super-regional strategy.

The failed $3.8bn tilt for Korea Exchange Bank is a case in point.

While a setback on the face of it, ANZ’s reputation was enhanced by refusing to match Hana Financial Group’s successful $4.2bn offer, although there have been suggestions that Smith’s team was “blindsided” by the late emergence of the local player.

“I don’t think we were blindsided so much as pragmatic and realistic to the idea that, if a Korean bank came into the equation, then we wouldn’t be able to match it because we wouldn’t have the synergies they’d have,” the ANZ chief says.

Smith also had a go at acquiring KEB when he was at HSBC.

In an indicator of how much values have fallen, HSBC said in September 2007 that it had agreed to acquire the same 51 per cent stake from US private equity firm Lone Star for $US6.3bn.

But Smith then left to join ANZ, and the crisis hit.

“Obviously it isn’t meant to be,” the ANZ boss jokes.

Locally, the bank surprised the market in October with a 53 per cent jump in full-year profit from $2.94bn to $4.5bn, as a strong margin performance enabled ANZ to exceed consensus forecasts by about 5 per cent.

The result precipitated another round of bank switching, as Westpac and Commonwealth Bank investors piled into ANZ.

One of the big questions to emerge from the result was the sustainability of the bank’s net interest margin, which improved five basis points to 2.5 per cent.

As UBS analyst Jonathan Mott notes, ANZ’s margin has expanded by 51 basis points since the first half of 2008 compared with only seven basis points for the rest of the sector.

While ANZ’s local business is skewed towards higher-margin business lending, Mott says ANZ’s margin is now 25 basis points higher than its nearest rival — the nation’s biggest business bank, National Australia Bank.

“No bank has ever held a margin lead over its competitors as wide as ANZ at present,” Mott says, suggesting the difference is partly explained by the bank’s repricing of its business book.

Smith agrees that ANZ repriced “quite aggressively”.

But the low-yielding part of the institutional balance sheet was also downsized, as large corporates deleveraged to reduce risk.

Other factors included repricing of previously fixed residential mortgages in New Zealand, and alleviated funding cost pressures from ANZ’s ability to tap $13bn in surplus customer savings in Asia.

Smith, meanwhile, is adamant that ANZ has made the right decision in standing aside from the core banking system upgrades that are being undertaken by his rivals.

It’s a decision that’s raising industry eyebrows all the more after NAB’s prolonged software outage that continues to cause grief for customers.

But the ANZ boss is unrepentant, saying he has never been a believer in big-bang information technology projects.

“I’ve never seen it done well, ever, by any bank,” he says.

“We’ve just agreed on a template for our architecture for the next 25 years, and what we have to do is simplify what we’ve got and then at some stage we’ll be replacing parts of our system.

“ANZ has a very different business model and business mix, so a big catch-all retail system is not as appropriate for us as it is for Commonwealth Bank, for example.”

That said, ANZ is rolling out a big Asian IT project and is consolidating two systems into one in New Zealand.

So technology won’t be the challenge for ANZ that it is for the other majors.

Macquarie suffers loss of key banker

MACQUARIE has suffered a major blow today with the resignation of high profile banker Andrew Low.

Mr Low was the chief operating officer of Macquarie Capital, the investment banking division of Macquarie Group , but has quit to start his own Asia Pacific regional financial services operations.

Mr Low was the architect of building Macquarie’s Asian operations, before returning to Sydney earlier this year.

The news has come as a major surprise at the bank, given Mr Low was seen as the second-in-charge of Macquarie Capital alongside the global head of investment banking Michael Carapiet.

He joined the bank a decade ago through the Bankers Trust acquisition.

Mr Low ran Macquarie Capital in Asia for six years until late 2009.

He led the growth of the business which now has operates across the region and employs more than 500 people.

In an internal announcement to staff, obtained by The Australian, Mr Carapiet said that Mr Low would remain as a consultant to Macquarie Capital after his decision to quit the bank.

Macquarie also announced that Len Caronia will become joint chairman and global head of the Financial Institutions Group (FIG), replacing Mr Low.

John Roddy will become the head of FIG in the US.

“After almost 20 years with Macquarie and Bankers Trust Australia, Andrew Low decided on a change in order to pursue a new business opportunity,” Mr Carapiet said.

“Andrew will retain his links with Macquarie and act as a consultant to Macquarie Capital Advisors.

“As many of you will be aware Andrew has been a leader of the Macquarie Capital business. He has taken Macquarie Capital from a niche player to the successful investment banking franchise that we have across Asia.

“We look forward to a strong ongoing association with Andrew and wish him well.”

The announcement also highlighted Macquarie’s role as the largest lead bookrunners for IPOs in China and Hong Kong in 2008, 2009 and so far this year.

Iceland arrests banker in crisis probe

ICELANDIC authorities today arrested Hreidar Mar Sigurdsson, the former chief executive of the collapsed Kaupthing bank, making him the first high profile banker to be detained in the wake of the Nordic country's financial crisis.

The special prosecutor investigating the Icelandic banking crash of October 2008 said Mr Sigurdsson was suspected of falsifying documents and breaking laws on stock trading for personal gain.

Mr Sigurdsson is being held in police custody until a bail hearing tomorrow at the Reykjavik District Court.

Prosecutor Olafur Thor Hauksson said he planned to ask that the former banker be kept in custody for two weeks to prevent the possibility of him tampering with evidence or interfering with the investigation.

Mr Hauksson was appointed by Iceland’s post-crisis government to investigate whether there was any criminal activity in the lead up to the banking crash that crippled Iceland’s economy, sent its currency into a tailspin, frightened off foreign investors and forced out the country’s leaders of the time.

Britain’s Serious Fraud Office is still conducting its own investigation into suspected fraud at Kaupthing, with a focus on efforts by the bank to attract British investors to its “high yield” deposit account, Kaupthing Edge.

About 30,000 British individuals, companies and organisations made an investment.

When it opened the investigation in December, the British agency said that it would work with the Icelandic special prosecutor because it also looked closely at a series of decisions that appear to have allowed substantial value to be extracted from the bank in the weeks and days before its collapse.

The demise of Kaupthing, one of several Icelandic banks to collapse, sparked a political row between Reykjavik and London because Kaupthing had failed after the British Government invoked anti-terrorist legislation to freeze the UK assets of another collapsed Icelandic bank, Landsbanki.

Britain’s Treasury said that the move was necessary to ensure the money that British savers had placed in the bank would not be whisked back to Iceland.

But Iceland’s prime minister at the time, Geir Haarde, criticised the move as an “unfriendly act” and blamed the decision for inspiring panic that led to the subsequent collapse of Kaupthing.

A cross-party committee of British lawmakers was later critical of London’s handling of the situation, saying that the government’s statements on the ability and willingness of Reykjavik to compensate non-Icelandic account-holders was “ultimately unhelpful”.

Banker warns of pitfalls

A BRACE of planned reforms to make the global financial system more stable could slow the economic recovery and encourage the development of a new shadow banking system, a senior banker has warned.

Andrew Crockett, president of JPMorgan Chase International, said he had no argument in principle with the regulatory push but warned there could be unintended consequences if the “stringent” draft rules proposed in December were implemented unchanged by the end of 2012.

“Unmodified, they will make it much harder to grow credit for a more rapid economic recovery,” Sir Andrew said.

“I also believe there’s a risk of diverting credit intermediation from banking into less regulated sectors, because experience tends to suggest that regulation creates incentives for unregulated institutions to grow up. There are very many ways for credit to flow through the economy; you can’t predict how it will flow.”

In his role at JPMorgan Chase, Sir Andrew manages relationships with global clients, including sovereign countries, international financial organisations and central banks.

He is a member of the JPMorgan Chase executive committee and served two terms as chief executive of the Bank for International Settlements.

While the Greek sovereign debt crisis was a “jolt to confidence” and there were dangers of troubles spreading to other countries such as Spain and Portugal, Sir Andrew said the gloom had started to lift.

“In the US, where I live, there is a sense of the corner being turned, with the recovery under way after two quarters of solid growth,” said Sir Andrew, who is visiting Australia. “That’s also the case in Europe, in the absence of the Greek crisis.”

The lesson from Greece was that a high sovereign debt load required a clear strategy to bring it under control. Greece was “a little slow to get a grip on it”.

He said he sympathised with Reserve Bank governor Glenn Stevens’ reservations about macro-prudential policy, under which APRA would manipulate bank capital ratios to help avoid “bubbles and bursts” in the economy. The RBA chief has said it has taken decades to build an understanding of how monetary policy interacts with the economy, and that macro-prudential levers are not only less well understood, but would be pulled by a different institution — the Australian Prudential Regulation Authority.

Sir Andrew said any initiative to moderate “pro-cyclicality”, in which the magnitude of the up or the down cycle was accentuated, was “well worth studying”, particularly so if the mechanism could be used without affecting the central bank’s ability to perform its key function of managing the economy.

US banker to head Mac Private Wealth

MACQUARIE Group has lured veteran US banker Eric Schimpf from rival Bank of America-Merrill Lynch to lead its private wealth arm, boosting the expansion plans of Australia's largest investment bank.

Mr Schimpf will lead Macquarie Private Wealth’s army of 425 advisers and oversee its 232,000 clients after relocating with his family from Atlanta.

“The growth aspirations of Macquarie Private Wealth greatly appeal to me,” he said.

“I look forward to the opportunity to play a leadership role in helping this business expand globally.”

Macquarie made a string of oversees acquisitions last year, including private wealth advisory network Delaware Investments for $US428 million ($464.5m).

Mr Schimpf replaces Peter Coleman, who left Macquarie late last year, and is understood to have left Merrill late last month after being approached by Macquarie.

Mr Schimpf was most recently Merrill’s regional managing director for US southeast operations, after starting as a financial adviser in 1994.

He was responsible for Merrill’s ultra-high net worth clients in the region.

Macquarie banking and financial services head Peter Maher welcomed Mr Schimpf’s “strong track record” at Merrill.

“His strong leadership qualities are ideally suited to Macquarie Private Wealth’s culture and supporting our advisers as they in turn advise their clients,” he said.

Prison likely for Mac banker

A JUDGE has told former Macquarie banker Oswyn De Silva he is facing a jail sentence for trying to flee the country.

Judge George Palmer said yesterday that given the seriousness of De Silva’s contempt — where he tried to leave Australia despite court orders restraining him from doing so — a custodial sentence was required.

But the judge later said it was “hypothetically open” that De Silva, who had HIV, might avoid prison, depending on whether he would receive proper medical treatment if jailed.

The corporate regulator is investigating claims De Silva made over $3.6 million through insider trading during his time at the bank.

De Silva has not been charged in relation to the trading.

De Silva will be sentenced next week.

Boutique US banker opens local office

NEW YORK boutique investment bank I-Bankers Securities plans to use its European and US networks to carve out a niche in the competitive local advisory market when it opens its first local branch next week in Melbourne.

It will trade as IBS Securities and be headed by former Goldman Sachs banker Dom Del Borrello, who has worked with Fortescue Metals boss Andrew Forrest at Anaconda Nickel.

Mr Del Borrello said IBS would focus on small to mid-cap resources and energy companies, worth up to $1 billion, which were looking to access overseas investors through its offices in London, Milan and New York.

“We’re not looking to compete with the established corporate advisory houses in Australia that tap the institutional markets in Australia because we add no value in that space,” he said.

“That’s a segment that’s very well represented by the Patersons, Azures, Argonauts and those guys, but they don’t have distribution capabilities into the US or Europe. They generally have to partner up with someone. That’s what we see as the opportunity.”

IBS’s plan is to work with local brokers to place funds offshore.

The strategy means IBS will compete more closely with major foreign-investment banks, such as UBS and Deutsche Bank.

Mr Del Borrello said IBS was working on a deal with HSBC.

“We’re happy on the larger transactions to participate, and on the smaller ones, happier to lead,” he said.

IBS plans to stick with equity raisings and initial public offerings in the $US15 million to $US200m range.

The boutique will offer merger and acquisition, and debt market advisory services, but has no plans to offer retail broking services.

“We’re not looking to set up an Australian brokerage or any retail here,” Mr Del Borrello said.

“We’re really just providing Australian corporates with access to European, American and also some Asian capital.”

The Melbourne office will act as the group’s Asian hub.

“Our focus is Australasia, so we’ll look at Australian corporates and corporates up in Asia,” he said.

But IBS’s focus won’t be restricted to taking corporates offshore.

“A number . . . are looking to invest into Asia and hopefully we can pick up some of those capital flows,” Mr Del Borrello said.

Ex-banker to put stamp on Australia Post

ONE of Australia's most senior bankers, Ahmed Fahour, will today be confirmed as the next chief executive of Australia Post in a move likely to fuel speculation that the government postal service may yet become some kind of “people's bank”.

But that speculation would be very, very wrong, Mr Fahour warned yesterday. The former NAB executive director is far more concerned about why Australia Post’s stamp prices are so low rather than about chasing down a banking licence.

In discussing his surprise decision to return to Melbourne only six months after being appointed chief executive of Bahrain-based Gulf Finance House, Mr Fahour signalled that an immediate challenge was to ensure Australia Post at least recovered the cost of running its core letters business.

Mr Fahour will take up the $2 million-a-year job on February 1; his immediate focus will be on the sensitive issue of stamp prices. “The letters business as it stands today loses money,” he said. “Australia Post has got the third-lowest prices in the Western world, the third-cheapest stamps in the Western world, and cost pressures that continue to rise; and at the same time you have the outside world with the digital revolution going on.”

Plainly, Mr Fahour believes stamp prices have to rise.

But his problem in making that happen is that Australia Post’s prices are regulated by the Australian Consumer & Competition Commission; two weeks ago, chairman Graeme Samuel blocked a request to lift the basic stamp price from 55c to 60c.

After a six-month review, Mr Samuel dismissed Australia Post’s application, saying he did not understand its demand forecasts nor why its cost base was not falling with demand for the letters service.

Mr Fahour nominated parcel services, both here and potentially internationally, and Australia Post’s 4033 retail outlets as his two biggest areas of strategic opportunity.

One issue that would remain off any reform agenda will be privatisation, Mr Fahour said. Not only is there no political will for a sale, it also makes no business sense, according to Mr Fahour.

“Having worked for public companies, I can tell you here and now that there are real, real benefits to not being listed,” he said. “Why would you want to change this wonderful situation. It is a business owned in the name of all Australians.”

Mr Fahour will become the first executive of Lebanese extraction to run Australia’s postal services and the first Muslim.