1. Banking and Financial Institutions
ACF-104
Guy Hargreaves
Wechat: Guyhargreaves

2. Case study: ANZ Bank How does a real commercial bank operate?

3. Today’s goals
Understand various components of an Australian commercial banking business
Review of important functions of a commercial bank including liquidity, capital, margins, revenues, strategy by studying ANZ
Form a sound understanding between the theory of banking and practice by studying ANZ bank case

4. ANZ Banking Group Top 20 global bank by market capitalisation
One of four major banks in Australia
Good commercial bank to study

5. Some ANZ shortcuts:
Australia – means retail + small commercial in Australia
New Zealand - means retail + small commercial in New Zealand
APEA – Asia Pacific Europe Americas (ie all the rest!)
IIB – Institutional Investment Bank ie all Commercial Wholesale Banking activities including Financial Markets, Corporate Banking etc

6. Sustainability important to ANZ

7. Elements of good banking

8. Global bank, regional strategy

9. Diversified income streams

10. Diversified balance sheet

11. Important numbers for ANZ
Provisions: write down of loan value which flows through P&L
PBP: profit before provisions
ROE: return on equity
CET1: Common Equity Tier 1 - % equity versus total assets ie regulatory capital
APRA: ANZ’s banking regulator

12. FX matters to results
Revenue generated in multiple currencies ie AUD, NZD, USD, GBP etc
When revenue generated in non-AUD then AUD FX rate important
If AUD FX rates held constant over the six months Revenue growth would have been 5.3%
NPAT: Net Profit after Tax
ROE: Return on Equity

13. Net Interest Margin NIM closely watched
Difference between deposit rates and lending rates mainly
NIM defined for:
Business Assets
Retail Assets
Deposits
NIM falling = more competition in market usually

14. Cost / Income closely watched

15. Return on RWA RWA: Risk Weighted Assets
Regulatory Capital = RWA * BIS III % ratios
BIS III % ratios set by Basel committees and managed by Bank Regulators
Return on RWA = NPAT/RWA
Gives properly adjusted sense of banks net earning margins adjusted for risk

16. Risk: Credit
Provisions are losses expected to be made on defaulted or near defaulted loans
Impaired Assets are financial assets that are under significant risk of having provisions made against them
ANZ’s impairment trend is positive ie problem customers are being worked out of the bank

17. X-Sell is vital in commercial banking
Customer acquisition costs are mostly fixed (not variable)
Once a Customer has passed KYC (Know your Customer) rules then an account can be established
Once an account is established ANZ wants to not just sell one product to the customer, but two or three or five!

18. Digital investment critical
From zero in 2012 ANZ has grown mobile banking revenue massively
Fending off the challenge from Silicon Valley which is using technology aggressively to poach bank customers
Commercial banks MUST invest in FINTECH or risk being left behind like the old taxi industry (UBER)

19. Many factors impact Wholesale Banking
ANZ Wholesale Bank was impacted by:
Margins, counterparty credit risk charges (FVA), commodity prices, regulatory costs, trade finance volumes, FX rates etc etc

20. ANZ Banking Group Top 20 global bank by market capitalisation
One of four major banks in Australia
Good commercial bank to study

21. Areas covered so far Capital allocation: sustainability
Commercial banks are interested in:
Group, financial, treasury, risk, strategy, mortgages, portfolio
Strategy: global, regional, local, technology
Risk: diversified income, asset portfolio, provisions, impairments, FX exposures, Cost/Income, KYC, liquidity
Financial: NPAT, ROE, RoRWA, NIM, X-sell,
Regulatory: CET1, RoRWA, LCR

22. Wholesale Asia strategy

23. Asia wholesale is diversified
ANZ wholesale bank’s Asia portfolio very well diversified across countries
China, Singapore, Japan, Hong Kong biggest exposures
In another 5-10 countries as well
Good management of Country Risk

24. ANZ in China

25. Markets revenue customer driven
Dodd Frank rules move financial markets towards customers and away from trading
Customer revenues not reliant on market volatility
Income variability lower when customer driven

26. Diversified markets income
Financial markets income diversified across products: FX
Rates
Capital Markets
Commodities
Other

27. Market risk carefully managed
Balance sheet usage low
Market VAR $ k
Low revenue volatility

28. Cost management

29. Continual investment Investing in: Risk management Security
Operational risk
Front office products
Front office infrastructure

30. Provisions: collective and individual

31. Historical losses lag corp leverage

32. Truly diversified portfolio

33. Diversified agri portfolio

34. Mortgage data – important!
Mortgages are THE core product of retail banks
ANZ’s mortgage business is very healthy
60% of all Australian lending is mortgages
LVR: Loan to Value Ratio ie the amount of mortgage outstanding / value of the property secured under the mortgage
Average mortgage size AUD 376,000

35. Mortgage risk - low
45% of ANZ’s mortgage portfolio is secured by property at LVR < 60%
Some mortgage LVRs 95%+ which is a bit risky
usually requires a mortgage insurance policy

36. Mortgage losses very low
For Australian mortgages ANZ losses (ie provisions that have turned into actual losses) 0.01%
If mortgage NIM is 2% then losing 0.01% is very acceptable
Losses are low because mortgages are secured by property at LVR of 60%-90% mainly
If borrower defaults bank can sell the property and usually recover all loan payments due ie recovery of 100%

37. Why low mortgage losses?

38. Prudent lending processes
ANZ has very strong and prudent mortgage lending practices
From pre-application to fulfillment (paying out the loan money) the system checks and assesses all risks carefully
Credit assessment very important

39. What more have we covered today
Risk: Asia strategy, portfolio diversification
Financial markets: customer focus, risk management, diversification of income, cost management
Balance sheet management: diversification
Mortgages: risk management, strategy, diversification

40. Good commercial banking
Good commercial banking requires sound management practices
Diversity: risk, income, geographies, business lines and products
Financial: focus on NIM, NPAT, regulatory capital, provisions (risk management), costs
Strategy: invest in technology, focus on strengths, understand your business, enter/exit business prudently
Good banking = healthy banking system = healthy financial system able to withstand crises/shocks

41. Regulatory Capital – important!

42. Balance Sheet composition

43. Remember Basel BIS III?
Increases Required Capital – Tier 1 up from 4% to 6%
Introduces Leverage Ratio – ratio of Tier 1 capital divided by “total exposure” to be a minimum of 3%
Introduces Liquidity Cover Ratio (LCR) – High quality liquid assets divided by net cash outflows over the next 30 days >100%
Introduces Net Stable Funding Ratio – Long Term Stable Funding divided by Long Term Assets (> 1-year) > 100%

44. LCR is operating at ANZ