A two-day rally to start the week has given way to yet another Greece-and-Europe-driven selloff on the Australian Securities Exchange (ASX), as the main stock benchmark Down Under shed 1.3 percent in Wednesday trade in Sydney after Reuters reported that it had seen a memo issued by the Euro Working Group (EWG) calling for eurozone countries to prepare policies that would lead to an “amiable divorce” should Greece exit the common currency.
But the European Union as a whole did account for 13.5 percent of Australia’s total trade in fiscal 2011. And Australia’s banks, forced to compete hard for relatively a limited number of domestic depositors, have traditionally relied on European capital to fund operations.
Of greatest concern, however, is that China’s already slowing economy will suffer even more due to events in the Occident. China was Australia’s largest individual two-way goods and services trading partner in 2010-11, accounting for 19.7 percent (AUD113.3 billion) of total trade. Japan was the second-largest, accounting for 11.8 percent (AUD67.7 billion), followed by the US at 8.8 percent (AUD50.6 billion).
Australia and New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) is a good place to start with an explanation of what’s happening on the Australian Securities Exchange this month, because of what it must do on international markets to continue funding loans as well as for its expanding presence in the Middle Kingdom and elsewhere in emerging Asia.
The stock, an Australian Edge Conservative Holding and an original member of our Model Portfolio, is among the biggest losers on the ASX this month, with a price-only decline of more than 13 percent that’s erased most of what had been an impressive 2012 total return.
Last Friday in Melbourne ANZ CEO Mike Smith caused a bit of a stir that fed into an already out of control downside frenzy on the Australian Securities Exchange (ASX) when he said that overseas funding markets were “closed again,” explaining that “this is what happens in this sort of situation.”
What Mr. Smith meant was that his bank’s as well as the rest of Australia’s Four Pillars’ access to finance for operations and risk management, in addition to traditional demand deposits from its domestic clients, had dried up due to the “situation” in Greece and Europe.
The other three of the Four Pillars–so called because of a law of Australian parliament that prohibits mergers between and/or among the major banks Down Under–are Commonwealth Bank of Australia Ltd (ASX: CBA, OTC: CBAUF, ADR: CBAUY), National Australia Bank Ltd(ASX: NAB, OTC: NAUBF, ADR: NAUBY) and Westpac Banking Corp (ASX: WBC, NYSE: WBK).
In a statement released later on May by ANZ Mr. Smith provided more nuance, noting, “European funding markets are essentially closed at the moment because of the uncertainty in Europe however Asian and US markets remain open.”
Mr. Smith added, “While we will see volatility as the European crisis unfolds, the situation is more manageable than 2008, when we had the shock collapse of Lehman Brothers, and Australian banks are well placed right now.”
ANZ has already completed its 2012 funding, and it’s had two years to anticipate and plan for the scenario unfolding in Greece and southern Europe. “It’s difficult to say what it will mean for funding costs but we need to bear in mind recent pressures have been caused by the cost of domestic deposits and that won’t change anytime soon,” Mr. Smith said.
Australian banks raise about AUD100 billion a year from wholesale funding markets to cover the gap between total loans and deposits. All of the Four Pillars have completed the majority such requirements for the year. ANZ has closed about AUD17 billion worth of debt deals during its fiscal 2012, which ends Sept. 30, 2012, including AUD8 billion of covered bonds.
This represents approximately 87 percent of its overall needs for the fiscal year. Nevertheless, ANZ, which had put together a strong rally in calendar 2012 on the strength of exposure to the broader Asian economy, is down 13.6 percent on the ASX this month. Commonwealth Bank, meanwhile, has shed only 4.9 percent in price-only terms, National Australia 6.1 percent. Westpac, which like ANZ had built a mid-double-digit price-only gain through Apr. 30, is off 9.9 percent in May.
More than any other Australian bank ANZ has identified itself in broader Asian terms rather than strictly Australian terms. And, despite what a skittish market may be saying in May, its approach should pay dividends in the long run.
ANZ’s revenue from the greater China region, including the Mainland, Hong Kong and Taiwan, grew 24 percent in the six months ended Mar. 31, 2012, compared to the same period in fiscal 2011. And the bank has also been granted a license to retail renminbi-based products in local markets.
ANZ is basically alone among the Four Pillars in its pursuit of “superregional” expansion strategy. Commonwealth Bank, National Australia and Westpac concentrate almost exclusively on Australia and New Zealand, traditionally safe and profitable markets where ANZ does too continue to compete.
But ANZ now has significant retail and business presence not only in greater China but also across the Pacific Islands, including Fiji, Tonga, Timor Leste and Papua New Guinea, South East Asia, including Indonesia, the Philippines, Cambodia, Vietnam and Thailand, and India.
Members of the Asia-Pacific Economic Cooperation forum, which includes 21 countries with borders on the Pacific Ocean such as China, Japan and the US, accounted for 70.9 percent of Australia’s total trade in fiscal 2011.
ANZ currently owns a 20 percent stake in both Shanghai Rural Commercial Bank and Bank of Tianjin. Its Chinese operations consist of six outlets, and it plans to increase its network to 20 outlets in the next five to 10 years, subject to regulatory approval.
In mid-May ANZ announced that it would invest another AUD300 million to support growth in its Chinese subsidiary as part of the bank’s push into Asia. The additional investment is the first since an initial investment of AUD395 million in 2010. ANZ aims to derive 25 percent to 30 percent of its profit from Asia by 2017.
ANZ is being punished this month, it seems, for its greater Asian ambitions. The stock closed at AUD23.99 on the ASX on May 1 but closed at AUD20.65 on May 23 in Sydney. It now yields about 7 percent.
The latest news out of Greece is not really news at all, as the possibility of its exit from the euro has been bandied about for months now. Nor should it come as any surprise that European officials may be making contingency plans.
This will not be a clean, concise break, either, as even after two years to prepare for the worst there will still be further writedowns for other European banks based on exposure to Greece as well as a further flight of deposits and rising defaults. This would impact the cost of that portion of its wholesale funding ANZ–and the other Four Pillars–may seek from Europe.
But ANZ–and its peers–still have access to Asian and North American sources of funding. And Chinese Chinese Premier Wen Jiabao said earlier this week that Beijing was prepared to adopt a more proactive fiscal policy to maintain growth.
“We should continue to implement a proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth,” Mr. Wen said.
And in a statement issued following a May 23 meeting led by Mr. Wen China’s cabinet noted, “Downward pressure on the economy is increasing,” and said it would encourage private investment in energy and other state-dominated industries in order to boost growth.
The ASX/SPI 200 Future Contract was down 23 points when I began writing, indicating a negative open on Thursday in Sydney, but had swung 14 points into the green by the time I concluded.
In the short term it’s a popularity contest. Over the long term a stock market is a weighing machine, and Australia and ANZ are in pretty solid shape from this perspective.
Courtesy David Dittman via Investing Daily - profitable advise for smart people (EconMatters author archive here)The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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