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Hint of obsession in big three banks' drive for efficiency

By Peter V O'Brien

Friday 19th May 2000

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The drive for efficiency among the three Australian-based banks that have the bulk of New Zealand's banking business - ANZ, National Australia Bank (NAB) and Westpac - continued in the six months ended March, to the point of coming close to an obsession.

ANZ chief executive John McFarlane said his bank had a new goal of a cost-income ratio "comfortably below 50."

The cost-to-income ratio is a measure of a bank's efficiency. A reduction in the percentage indicates efficiency has improved and a rise indicates efficiency has slipped.

Westpac managing director David Morgan said his bank's 16.7% profit increase to $A818 million "continued to build on the trends evident in the second half of 1999: solid earnings growth, improved operating efficiency and sound credit quality generating strong growth in after-tax profit."

Westpac's cost-to-income ratio was 55.5% in the six months, compared with 58.7% in the corresponding period of 1999.

Dr Morgan said the bank's return on equity was at an historically high level and it was making good progress in containing expenses.

He returned to the efficiency theme when saying a fundamental element of Westpac's strategy was to drive earnings growth while ensuring the cost structures were in line with domestic and global benchmarks.

Westpac had implemented more than $A100 million of expense reductions at March 31. That was "tracking ahead" of the planned $A300 million of reductions announced last year.

The banks' share prices held up well this year, as shown in the table, despite the worldwide shakeout when technology stocks led the downturn.

Apart from the general drive for cost efficiency, the banks' reports indicated they were rapidly developing e-commerce facilities.

Mr McFarlane said ANZ had made strong progress in e-commerce, with more than 250,000 personal customers online with

He said 15% of those customers in Australia who regarded ANZ as their main bank were now online, the highest penetration level of any major bank.

The increasing e-commerce activity should have the side-effect of improving the banks' efficiency beyond current levels, a point borne out in a comment from Dr Morgan who said investments in e-commerce capabilities contributed to Westpac's improved internal operating efficiencies and enhanced the service offered to customers.

Rapid growth in e-commerce can be seen in ANZ's 250,000-plus customers on- line at March 31, well up on the 100,000 mentioned in the report for the full year ended September 1999.

The banks are constantly stressing the links between greater efficiency and customer relationships but a cut in the efficiency ratio does not necessarily improve those relationships. At an anecdotal level, that was seen last Friday when the main Wellington branch of a major bank had a queue of 16 people waiting for teller service in mid-afternoon and there were only two tellers at the counters.

Admittedly, it was around the time for tea breaks but if that situation was replicated in other branches of other banks the "personal touch" baby would be in danger of going out with the cost efficiency bathwater.

The banks appear to have become more cautious about their expansion and acquisition activities.

Westpac's Dr Morgan said the bank would continue to examine acquisition opportunities that may arise but it would maintain strict valuation disciplines, particularly with many assets priced at historically high multiples in both actual and relative terms.

ANZ's Mr McFarlane also addressed the point when he referred to risk reduction, specifically in regard to the bank's recent sale of its Grindlays businesses in the Middle East and South Asia Standard Chartered for $A2.2 billion in cash in a deal that would give ANZ a $A400 million one-off gain.

Mr McFarlane said the sale would substantially reduce the bank's exposure to non-core emerging markets.

Emerging market exposures on completion of the sale would be a third of the level when ANZ entered the Asian crisis. It had brought down its overall level of risk into line with its "domestic peers."

The Grindlays sale would reduce ANZ's emerging markets credit exposure by about $A7 billion and enable the bank to improve its return on capital through a lower tier-one capital ration.

Share buybacks are another example of the Australian banks' quest for efficient operation, with ANZ extending its buyback scheme to enable it to buy back up to an additional 85 million ordinary shares.

ANZ had a capital surplus after the Grindlays sale and from the high level of internal capital generated from strong earnings growth.

Banks around the world have expanded activities through mergers and acquisitions, often in activities that are not traditional banking businesses, to create multi-faceted financial enterprises.

That will continue but it seems the Australian banks are taking a cautious approach to such expansion in relation to regions and the prices being paid for new assets. That can be seen as another aspect of the efficiency drive.

Australian bank statistics six months ended 31.3.00

BankNet profit $Am% changeShare price 12/5/002000 high2000 lowCost/income 1999 %Cost/income 2000 %

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