Banking and Financial Institutions ACF104 Guy Hargreaves Wechat

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

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

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 theory of banking and practice by studying ANZ bank case 3

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

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 5

Sustainability important to ANZ 6

Elements of good banking 7

Global bank, regional strategy 8

Diversified income streams 9

Diversified balance sheet 10

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

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 12

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 13

Cost / Income closely watched 14

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 15

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 16

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! 17

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) 18

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 19

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

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, Ro. RWA, NIM, X-sell, �Regulatory: CET 1, Ro. RWA, LCR 21

Wholesale Asia strategy 22

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 23

ANZ in China 24

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 25

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

Market risk carefully managed � Balance sheet usage low � Market VAR $150 -200 k � Low revenue volatility 27

Cost management 28

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

Provisions: collective and individual 30

Historical losses lag corp leverage 31

Truly diversified portfolio 32

Diversified agri portfolio 33

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 34

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 35

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% 36

Why low mortgage losses? 37

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 38

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 39

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 40

Regulatory Capital – important! 41

Balance Sheet composition 42

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% 43

LCR is operating at ANZ 44