By Tim O’Shannassy

Acknowledgement

Introduction

Shane Elliot was chosen to be Chief Executive Officer of ANZ Banking Group Limited (ANZ) from a strong field of candidates in 2016. With the Covid-19 pandemic raging, former Chairperson David Gonski recently retired and new Chairperson Paul O’Sullivan now leading the board of directors (BOD) Elliot now has much to ponder.

There is a lot for Elliot to consider. He has received tremendous support and mentoring from Gonski, and they formed a powerful team. Now he needs to present to an O’Sullivan led board a compelling strategy agenda for ANZ for the next five years and beyond that will reinforce the enduring theme of his tenure.

Market analysts have identified that both ANZ and rival National Australia Bank (NAB) – the two Melbourne-based banks of the “big four” – are weaker in retail banking than their Sydney rivals Westpac Banking Corporation (Westpac) and Commonwealth Bank of Australia (CBA) (Fullerton, 2021). Elliot has weighed up the organic growth prospects of ANZ and has received advice from his executive team on the option of acquisition and merger of regional lender ME Bank. Meantime NAB Chief Executive Officer Ross McEwan is focused on the purchase of Australian neobank 86 400 – a transaction giving NAB access to more millennial and young customers while removing another start up financial services business from the market.

Banking and finance is an intensely competitive industry that makes a significant contribution to Australia’s gross domestic product (GDP), with the “big four” comprising approximately 25 per cent of the weight of the Australian Stock Exchange (ASX) Top 200 market capitalisation (Neiron, 2020).

The two leading profit centres for ANZ in 2020 were the Australian retail and commercial operating segment contributing A$3.339 billion (2019 A$4.653 billion) profit before tax, and institutional A$2.579 billion (2019 A$2.607 billion) profit before tax.  In 2020 New Zealand operations contributed A$1.424 billion (2019 A$1.943 billion) of the A$5.516 billion Group profit before tax. Pacific operations delivered a A$64 million loss (2019 A$83 million profit) (ANZ, 2020).

Trends in the external environment and the industry environment provide both an opportunity and a threat. The Covid-19 pandemic has had a big impact on the ANZ customer base with the Australian Government Jobkeeper program keeping employees connected to employers while the business community and population copes with the pandemic threat. Interest rates are at an historic low and advances in technology are leading to innovation in the financial services industry.

An Uncertain Business Environment in the 2020 Pandemic

In the early months of 2020 the COVID-19 pandemic had a strong adverse economic impact around the world; COVID-19 required many countries to introduce restrictions on work and the movement of people, while international borders were closed in countries such as Australia and New Zealand.

Climate change and a greener future is an increasing concern of the Australian community. The Morrison Government has not embraced long range emissions targets and/or a price on carbon as a market-based solution to managing emissions, though there has been an evolution of debate in Australia with the election of Joe Biden as President of the United States (Kehoe, 2021).

In 2021 the populations of the United States, the European Union, Brazil, Russia, South Africa and more than 200 nations around the world continue to struggle with high rates of COVID-19 infection and death. This is impacting world GDP in 2020 in the range -4.5 per cent to -6.0 per cent with a partial recovery in the range 2.5 per cent to 5.2 per cent expected in 2021 (Congressional Research Service, 2021).

Australia’s GDP fell 3.8 per cent in 2020 including a 7 per cent fall in the March-June quarter of 2020, followed by an increase of 3.3 in the June to September quarter (Australian Bureau of Statistics, 2021). As part of the Australian Government’s response to the pandemic economic support was provided to the community through a portfolio of programs including Jobkeeper, Jobseeker, Homebuilder, the coronavirus small and medium size enterprise loan guarantee scheme alongside Reserve Bank of Australia (RBA) action to support the flow of credit. This RBA action included establishing a A$200 billion term funding facility with an interest rate of 0.25 per cent to support the banking system. The RBA cash rate is at 0.10 per cent (Australian Treasury, 2021). The Australian Government has forecast a deficit of A$198 billion in the current fiscal year, with Federal Government debt at $811 billion (Wright, 2021). Australia’s GDP is expected to grow at 3.5 per cent per annum in 2021 with inflation below the RBA target band of 2-3 per cent per annum at 1.3 per cent (International Monetary Fund, 2021).

The “four pillars policy” was adopted by the Hawke Government in 1990 to prevent any further mergers between ANZ, NAB, Westpac and CBA – this is formal policy by politicians, not regulation. A key influence on this was the stress on the banking and finance industry in the early 1990s and lessons learned on the need for sound capital management and stability in this vital industry – at the time in business history ANZ, Westpac and CBA were having to manage significant credit impairment problems which caused economic instability impacting a generation of entrepreneurs.

Social media is having a significant impact now on commerce. More youthful customers will be more likely to compare their online banking experience with their other online experiences and be prepared to change their bank (Yeates, 2021).

Technology is continuing to evolve and is having a number of impacts in the banking and finance industry (Wade et al., 2020), including the influence of technology systems and online platforms giving a competitive edge as rivals compete for market share (Yeates, 2021). There is also a greater incidence of attempted fraud and cyber-attacks (ANZ, 2020).

Banking and Finance Industry Trends

This is an intensely competitive industry – on a number of fronts (e.g. demographics of customers, information technology, product, customer service) – that makes a significant contribution to Australia’s gross domestic product (GDP).  There are significant benefits to the Australian economy (and the New Zealand economy) from the strength and stability offered by the “big four” banks that in the view of policy makers on balance outweigh the criticisms of duplication of competition and governance protections in the law (Ryan, 2018). Rich experience from the booms and busts of the Australian economy have informed policy makers choices not to allow complete free reign to the “animal spirits” of capitalism in Australian banking and finance (Ellis, 2016), hence “four pillars”.

Another trend in the banking and finance sector in Australia is the emergence of the popular Afterpay – the buy now pay later (BNPL) market has proven to be quite attractive to millennials (Yeates, 2021). CBA have purchased 5 per cent of the Swedish BNPL provider Klarna which has enjoyed strong growth in the United States (Yeates, 2021).

This industry is about being an intermediary with money – strong performance is traditionally associated with business growth in loans and deposits, better cost control and better margins. Disruptive technology can appeal to segments of the broader market (e.g. millennials) but may not deliver on all of these desirable outcomes for a comprehensive performance (Yeates, 2021).

Youthful customers want innovative solutions and have less brand loyalty to a “big four” provider compared with their parents. Afterpay and the trend to BNPL has really shaken up the banking and finance sector. This opens this industry sector to innovative solutions including innovative philosophies – the market domain of the Australian neobanks. The “big four” have shown an appetite to acquire interesting emerging businesses with the most recent example the NAB purchase of 86 400. Institutional investor interest in bitcoin is currently surging, presenting an interesting future challenge for the “big four” and ASIC (Eyers, 2021), while blockchain is in its early stages of development (Pollock, 2019).

A number of smaller players or neobanks have emerged in the banking and finance industry in Australia in recent years to challenge the “big four”, either with a niche offering associated with digital offering or a particular connection to a region or demographic.  They include 86 400 acquired by NAB, Douugh, Judo, Revolut, Volt and the failed Xinja. Threat of new entrants is real.

There are different segments to this market – retail customers, business banking customers and institutional customers. Millennials and Generation Z consumers are not affiliated with the “big four’ like their parents have been, a generational shift in financial services is in progress. We are seeing that younger bank customers will compare their online banking experience with their other online experiences and be prepared to change their bank (Yeates, 2021). Institutions like CBA are aware of these trends and investing heavily in their online offering and seeking to personalise this offering for their customers (Yeates, 2021).

There is a bank information technology race in progress with substantial financial resources committed (ANZ, 2020). A number of providers to this industry including human resource contractors, software developers, systems engineers, real estate valuers, brand valuers, providers of legal services and providers of accounting services. The “big four” have tremendous market power here with scope to negotiate on price and ask for a requisite level of quality and talent given their substantial scale of operations and purchasing power.

Banking and Finance Industry Law and Regulation

In Australia the Australian Prudential Authority and the Australian Securities and Investment Commission (ASIC) oversee the financial scene, merger and acquisition activity, and the ASX. Foreign investment in Australia is overseen by the Australian Foreign Investment Review Board; trade practices are overseen by the Australian Competition and Consumer Commission.

In New Zealand the Reserve Bank of New Zealand, the Securities Commission of New Zealand and NZX oversee the New Zealand Stock Exchange and the financial scene. In New Zealand the Foreign Investment Review Board has oversight of foreign investment in on behalf of the Government.

In Australia The Corporations Act 2001 and sets out the laws that apply to corporations, including the duties of directors. The Competition and Consumer Act 2010 sets out competition and fair trading law, and protections for consumers.

In New Zealand The Companies Act 1983 set out laws that apply to corporations including the duties of directors. The New Zealand Commerce Commission is responsible for enforcing the Fair Trading Act 1986, the Commerce Act 1986, plus the Credit Contracts and Consumer Finance Act 2003.

The company tax rate in Australia is 30 per cent, in New Zealand 28 per cent, compared to the United States at 21 per cent. New Zealand corporates are taxed on income earned globally, while overseas corporates are taxed on income earned in New Zealand.

A further legal and regulatory consideration is stronger stakeholder scrutiny and community expectations of bank executives and company directors (ANZ, 2020).

ANZ Banking Group Limited Strategic Situation

ANZ provides banking and financial products and services in 33 markets to more than 8.5 million customers in retail banking, business banking and institutional banking. ANZ explain their purpose as:

Our purpose is to help shape a world in which people and communities thrive. That is why we strive to create a balanced, sustainable society in which everyone can take part and build a better life (ANZ, 2020, p. 10).

A recent concern for ANZ is loss of market share in mortgages and household deposits (Fullerton, 2021).

ANZ states its vision is as follows:

Our vision is to build a bank of which we can all be proud – whether you are a customer, a shareholder or an employee – known for:

• • delivering value from innovative and convenient banking services that help customers get ahead in life – improving their financial wellbeing
  • building the best and most diverse team of people, regardless of where they ultimately work
  • showing leadership on important issues, and doing the right thing, even when it comes at a cost
  • delivering consistently strong financial results for our shareholders, with a balance between growth and return, short-and long-term results (ANZ, 2020, p. 11)

ANZ see their values as the foundation on which the organisation works. They articulate their values as:

1. Integrity
2. Collaboration
3. Accountability
4. Respect
5. Excellence (ANZ, 2020, p. 10)

ANZ brings its purpose to life by helping to resolve complex social and community issues including financial wellbeing, environmental sustainability, and improving suitable and affordable housing options for Australian and New Zealand customers.

ANZ has a Code of Conduct with which all employees and contractors must comply (ANZ, 2020) although there have been some well publicised misadventures with senior executive behaviour in the not too distant past (Whyte, Shapiro, Thompson, Moullakis, 2016).

ANZ also takes seriously the recruitment, training, development and engagement of their workforce with a substantial time and financial commitment to training each year (ANZ, 2020),

ANZ is committed to the United Nations Sustainable Development Goals (SDGs) supporting 11 of the 17 SDGs (ANZ, 2020).

Shareholder value is also a high priority with a business target of “decent returns” to allow shareholders to meet their personal goals (ANZ, 2020, p. 13).

Functional Level

The ANZ balance sheet, income statement and cash flow summary in Table 1 below exhibits the characteristics of a banking and services business with its focus on utilising liabilities including deposits, derivatives and debt issuances to create assets in net loans and advances, investment securities and derivatives to earn interest income and other income.

The 2020 financial result presented to share market analysts by Chief Executive Officer (CEO) Shane Elliot was disappointing but not surprising given the difficulties caused by Covid-19. Operating income was lower while operating expenses were up slightly in 2020; total equity was down slightly.

Operating expenses included personnel A$4.878 billion (2019 A$4.765 billion), premises A$789 million (2019 $719 million), technology A$1.824 billion (2019 A$1.534 billion), restructuring A$161 million (2019 A$77 million), and professional fees A$667 million (2020 A$537 million) (ANZ, 2020).

ANZ tax expense in 2020 was well down at A$1.84 billion (2019 A$2.609 billion) due to the reduction in profit before income tax. Basic earnings per share and the annual dividend were also well down, mainly reflecting reduced profit before credit impairment plus the impact of the greater credit impairment charge (ANZ, 2020).

Strong stakeholder relationships are good for the community and the ANZ brand. The ambition of ANZ is to provide a great, personalised customer experience including improving the financial wellbeing of ANZ customers, leveraging digital infrastructure.  Advertising and public relations expense was contained in 2020 at A$177 million compared with A$226 million in 2019 (ANZ, 2020). The digital offering is an important element of the ANZ brand reach to consumers, young and old as it seeks to improve performance in household deposits and mortgages (Fullerton, 2021). The maintenance of a right sized retail branch network in the right locations is also a key element of the marketing and operations strategy.

Lending is provided to retail, business banking and institutional banking customers in Australia, New Zealand and the Pacific. ANZ retains an interest in doing business in Asia with 4,000 employees, 324 automatic teller machines (ATMs) and 93 branches in 15 markets (ANZ, 2020), however the aggressive Asia strategy pursued under former Chief Executive Officer Mike Smith has been paired back to a more selective approach (Patrick, 2016).

In relation to technology and data capabilities ANZ is giving emphasis to flexible, digital ready infrastructure to deliver a quality customer experience (ANZ, 2020). Systems and processes that allow customers to do secure transactions efficiently and accurately aid risk management (ANZ 2020). To help achieve this outcome ANZ recruited 500 software and systems engineers in 2020 with a view to strengthening capability in engineering and data (ANZ, 2020).  The banking sector is spending heavily in this area (Moullakis, 2021); ANZ pend on subscriptions licences and outsourced services in 2020 was A$780 million compared with A$672 million in 2019 (ANZ 2020).

Table 1: ANZ Banking Group Limited Financial Summary Financial Years 2019 and 2020 (ANZ, 2020)

*Cost-to-income ratio is calculated by dividing operating expenses by operating income

ANZ continues to develop its workforce, culture, behaviours and capabilities while keeping employees Covid-19 safe. ANZ has had significant challenges with poor senior executive behaviour in the past (Whyte et al., 2016). A range of responses has been developed and implemented to provide the right support for the different challenges of employees who are customer-facing and employees who are working from home (ANZ, 2020).

Employee engagement and development of workforce capability are important priorities for ANZ. Approximately 970,000 hours of workforce learning was delivered in 2020 including 530,000 hours of compliance training (ANZ, 2020).

In March 2020 ANZ received a sharp increase in hardship applications from households and businesses impacted adversely by the pandemic. Approximately 94,000 customers reached out for assistance in the period 1 March 2020 to 31 May 2020 (ANZ, 2020). A talent identification and mobility program commenced at this time to move employees into the Customer Contact Centre, Customer Service Operations and Customer Resolution teams supported by a substantial customised training program (ANZ, 2020).

ANZ wants to have a workforce that represents the communities it serves. The Women in Leadership objective (33.4% in 2020 up from 32.5% in 2019) focuses on improving the balance of woman in Senior Executive, Executive and Senior Manager positions – this work will address the gender pay gap. The Group Executive Committee and Key Management Personnel is gender balanced. ANZ also has initiatives for people from under-represented groups in the community including indigenous Australians (ANZ, 2020). The Spectrum Program has been developed to provide support for autistic members of the workforce, and the Return to Work Program for those who have had a career break (ANZ, 2020).

The Future Strategy Challenge

This is a crucial moment in the evolution and history of ANZ, and a big moment for Elliot. Will the ME Bank acquisition play achieve regulatory approval? How will ANZ sustain growth and deliver profit growth in the short, medium and the long term? How can ANZ better manage its cost-toincome ratio? How will ANZ manage current and future strategic risks? What major projects should have priority for ANZ in the medium term? What major projects should have priority for ANZ? How can ANZ best be proactive about its future and shape its industry? What should the ANZ strategy be?

References

ANZ Banking Group Limited, 2020, Annual Report, Melbourne, Australia.

Australian Bureau of Statistics, 2021, Australian National Accounts: National income, Expenditure and Product, https://www.abs.gov.au/statistics/economy/national-accounts/australiannational-accounts-national-income-expenditure-and-product/latest-release, downloaded 12 February 2021.

Australian Treasury, 2021, Economic Response to the Coronavirus, https://treasury.gov.au/coronavirus/business-investment, downloaded 12 February 2021.

Commonwealth of Australia, 2001, Corporations Act, Canberra ACT.

Commonwealth of Australia, 2010, Competition and Consumer Act, Canberra, ACT

Commonwealth of New Zealand, 1983, The Companies Act, Wellington, New Zealand.

Commonwealth of New Zealand, 1986, Commerce Act, Wellington, New Zealand.

Commonwealth of New Zealand, 1986, Fair Trading Act, Wellington, New Zealand.

Commonwealth of New Zealand, 2003, Credit Contracts and Consumer Finance Act, Wellington, New Zealand.

Congressional Research Service, 2021, Global Economic Effects of COVID-19, 10 February, https://fas.org/sgp/crs/row/R46270.pdf, downloaded 12 February 2021.

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Patrick, A. 2016. Where ANZ’s $88m bet on Mike Smith went wrong: Inside story, The Australian Financial Review, 29 July, p. 1.

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