ANZ Makes a Much Needed Change

Global markets rallied overnight, giving Aussie investors strong hints the ASX 200 would join the club. The assumptions were right. The ASX 200 is up around 1.88%. Hopefully this climb will continue. One sector positively affected by the climb was the banking sector. All Big Four banks are up around 3–4%, with the best performer so far being ANZ Banking Group [ASX:ANZ].

It’s not just global optimism contributing to ANZ’s performance today, either. Lately it’s been hard for banks to create value for shareholders. The regulation of the financial system is making it tougher for banks to make aggressive investments.

Low interest rates are a factor affecting the bank’s ability to make investments, like loans and mortgages, profitable. However, ANZ is trying to combat tight regulations by restructuring. ANZ’s wealth chief, Joyce Phillips, is being pushed out as a result of the restructuring process.

ANZ will be making changes to their wealth management arm, sitting on assets of $67 billion. Activities like insurance, superannuation and investment products will be simplified. As a result, Ms Phillips had to go. She’ll be joined by ANZ’s wealth, marketing and innovation divisions.

The simplified approach also provides the opportunity to focus on improving returns and capital efficiency from our insurance, superannuation and investments product business given higher regulatory capital requirements’, said Shayne Elliott, ANZ CEO.

Overseas revenues are expected to slow further on weakening emerging economies. Domestically, ANZ seems fine. However, bad debts could be rising in ANZ’s international and institutional banking units. Bad debts have actually been a trend for ANZ, extending from last year into 2016.

On top of this, ANZ’s cash based Return on Equity (ROE) is expected to fall to 13.1% for 1H FY17. Below is a graph of ANZ’s ROE over seven years.

ANZ return on equity

Source: Bloomberg

But what does ROE mean? In mathematical terms, it refers to net income divided by shareholders equity. However, if we put it in laymen’s terms, ROE just measures a firm’s efficiency. Companies with high ROE’s are therefore considered more efficient in their use of shareholders equity.

ANZ isn’t the only bank trying to find new ways to boost earnings. UK bank Barclays is also restructuring their business. The push to restructure came on the back of slumping profits. ‘The challenge we need to do is wind down our non-core assets as we simplify Barclays business model’, said chief executive Jess Staley.

Keeping up with trends

Technology will become even more interwoven into our everyday lives in the future. We are using more and more tech to become more efficient. And in some cases just to make our lives easier. This trend is only going to increase into the future. Banks are promoting technology in a big way. Algorithmic trading systems are just one way to streamline operations. And streamlining counts for a big chuck of banking profits.

But ANZ have decided to take it one step further. Recently, ANZ hired the head of Google’s Australian operations, Maile Carnegie. She will help ANZ catch up to rivals in the multi-billion dollar technology arms race taking place between banks.

Carnegie will be placed in the newly created position: Group Executive for Digital Banking. And if they encouraged her to leave Google, just imagine what opportunities she could create within the financial sector.

Maile’s appointment recognises that digital is central to driving revenue growth and to successfully competing in a changing and disrupted environment where technology and brand are key sources of differentiation’, Mr Elliott said in a statement.

The move sounds promising, as ANZ’s tech is perceived as being behind Commonwealth Bank of Australia [ASX:CBA]. Hopefully, with their boost to technology, ANZ can yield returns in the long run for shareholders.

Härje Ronngard,

Junior Analyst, Money Morning

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