Sydney, Nov 28, 2007 (ABN Newswire) - The new ANZ Banking Group CEO, Mike Smith has joined retiring Westpac CEO, David Morgan in calling for the abolition of the four pillars banking policy to allow Australian banks to compete with a looming wave of competition from Asia.

Mr Smith told a Sydney business lunch yesterday that the four pillars policy, which prevents the biggest banks from merging, had developed an inward-looking culture with the local banking system.

His comments came as the crippled huge US bank, Citigroup was revealing it had paid an interest rate of 11% a year to raise $US7.5 billion from the sovereign wealth fund of Abu Dhabi, to shore up its depleted capital base.

An interest rate that high (more than twice market rates in the US) is a sign of how poorly Citigroup's prospects are considered.

It is real bail out material. And the fact that it came from the rich Gulf states means that there was no US investor or investors who were capable or who thought Citigroup worth saving.

Mr Smith didn't know that as he started his first major foray into the public arena.

Perhaps he should have paused for a fraction when he told the lunch "Given the mature Australian and New Zealand economies and that the market rewards growth, it is clear that our banks face a fundamental problem.

"They will eventually become ex-growth relative to the opportunities in Asia and increasingly marginalised as regional banks expand in Asia and ultimately in Australia."

Mr Smith claimed that banks from Asia would form the next wave of competition in Australia.

"But unless we become more outward looking now, the next wave of competition from Asian banks with best-in-class customer solutions will be formidable competitors."

Mr Smith, the former head of HSBC's Asian operations, said the election of the Rudd government provided Australia with a fresh opportunity to abolish the four pillars policy and allow the banks to grow to a size where they can compete as "super regionals".

"Now is the time for both Australia and New Zealand to make the decision about whether we won't to be real players on the world stage, but we must do this quickly - the world will not wait for us."

His comments, like those of Dr Morgan, are from senior bankers who look at the lack of growth prospects in the region and desire to do a big deal.

But his comments betray a lack of experience about Australia banks.

Four pillars would not be an impediment to a local bank doing a deal with an overseas major. Former Treasurer, Peter Costello made that clear.

Mr Smith's former employer, HSBC has a presence in Australia, as does Citigroup, the biggest bank by assets in the US.

Both have looked at but rejected any deal to grow in Australia because of the small size of the market and the huge cost in acquiring one of the local banks.

As well, the most logical competitors Mr Smith are talking about are Chinese state-owned banks. They would not be allowed to operate in Australia in deposit taking or owning local banks because the regulation and accounting controls on them in their home market are well below Australian standards.

The local regulators would also insist on some reciprocity in terms of regulatory controls which the Chinese Government hasn't attempted so far with any major western country.

Chinese banks have made small deals for equity stakes in Standard Bank of South Africa, have tried to buy the 17% in Standard Chartered from Temasek Holdings and have bought a small bank in the US.

Japanese banks are not going to be big in Australia: they had their chances in the 1980s and early 1990s but were crippled by the collapse of the Japanese property bubble and remain low profit, low performance giants today.

The three banks in Singapore are not players and it is hard to see any other banking system capable of throwing up banks as well versed in international deals as being a threat to Australia.

We have also heard similar pleas from banking leaders in the past. Former NAB CEO, Don Argus was a frequent caller for the four pillars to be removed and warned against big foreign competitors, especially so-called monoline operators (such as big credit card operators from the US).

Many of the banks Mr Argus warned about are now crippled by subprime mortgage debts and losses and write-downs on poor corporate loans or credit derivatives.

Citigroup has been crippled, with more to come to come according to New York analysts at Goldman Sachs and other brokers and banks. HSBC is struggling: it has already taken losses of more than $US12 billion on dodgy subprime loans and associated credit derivatives and took $US45 billion in debts and assets from off balance sheet funding vehicles back onto its balance sheet on Monday because it couldn't get rid of them.

Goldman Sachs says HSBC could be forced to write down another $US14 billion in losses and provisions on dodgy subprime linked loans in coming months.

Mr Smith should know about the impact of those dodgy deals because he was HSBC's chief in Asia and was passed over for the top job.

He and Dr Morgan neglect to point out that Australian banks have escaped the worst of the subprime disaster, which is now the biggest banking crisis to hit the US, possibly since the depression.

Even Chinese Government banks have been caught up with an estimated $US10 billion in dodgy deals, but given their huge capital bases, that's not a great imposition.

So what are these calls all about?

It's the change of Government.

Dr Morgan is retiring and he sensed the end of the Howard Government meant the time was right for some special interest lobbying, while Mr Smith is new into the market and feels the new government is a chance for him to make his name.

There is nothing stopping any of our big banks from making a major acquisition offshore, except unrealistic prices and the threat of being monstered by local fund managers and institutions concerned at the dilution of earnings and poor acquisition and execution skills.

The most probable reason for wanting the four pillars to disappear is that it clears the way for the big four to merge, or for one of them to attack St George in a carve up.

But that would be a shares and cash deal and the justification for doing the deal would come in sacking thousands of workers and closing hundreds of branches and selling them off and ignoring the fact that people want a bit of competition.

The history of bank mergers in this country, where the banks are healthy, is that it creates no value. Westpac's market share in WA is now lower than it was when it acquired Challenge Bank.

The only acquisitions that work are when one bank is crippled, as when the CBA bought the State Bank of Victoria and kicked off its privatization and the privatisation boom that saw the likes of Qantas, Telstra and other assets sold off by government.

Mr Smith confirmed that the ANZ had almost 2000 employees working in India in software development and IT support and said the bank would continue to develop its operations there.

And the ANZ is by far the most advanced in doing this: not using India as a cost lowering out sourcing business, but one which generates cost saving improvements in processes and operations.

The ANZ had an unhappy experience in moving into India in the 1990s when it bought the Asian operations of Grindlays. That enmeshed the ANZ in a horrible and costly local drama that took years to resolve, at considerable cost.

Mr Smith didn't mention that, nor the NAB's $4 billion loss on the Homeside mortgage business in the US. If the NAB had still been an owner of Homeside, it would have been up to its neck in the subprime mess and possibly been weakened to the point where that might have forced the four pillars arrangement to be broken down.

The purchase of Homeside from the NAB was the biggest Savings and Loan in the US, Washington Mutual: it has been hurt badly by the subprime mess and is looking at billions in losses and a sharp contraction in lending over the next year. It has already laid off staff in many US states.

That could have been the NAB.


 

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