Big Bank Theory

That the Australia and New Zealand Bank (ANZ) was looking at hiving off its Grindlays business for the last two years was the worst kept secret in global banking circles. What came as a surprise was that Standard Chartered (Stanchart) should have bought it over.

Today, issues are being raised about the cultural "fit" between these two elderly banks, globally and in India. But if senior executives are to be believed, the strategic "fit" was perfect.

For ANZ, the search began with the south east Asian crisis in 1997-98, ANZ shareholders raised a furore at the annual general meeting in 1998.

 

The financial turmoil in Asia and the collapse in emerging markets bond prices led to a 39 per cent fall in the profitability of ANZ's international operations. Non-performing loans increased from Australian dollar (AUD) 872 million to AUD 1,662 million, with the increase mainly coming from Asia, ANZ said in its report to shareholders.

That sparked a furore at the bank's 30th annual general meeting in November 1998. Chairman Charles Good said "ANZ has a long established position as Australia and New Zealand's international bank and therefore felt the impact of the Asian turmoil and the collapse in emerging financial markets. Our review of these activities led us to substantially reduce our non-core Asian exposures and exit our capital markets operations in London."

What he meant by "non-core Asian operations" could not have been anything other than the Grindlays business. The Grindlays line of banks in south and west Asia is what ANZ acquired in the early eighties from Citibank. But shareholders wanted more drastic action.

"After the Asian crisis, we have reduced our higher risk and non-core exposures in emerging markets and this move has been well received," Elmer Funke Kupper, the Melbourne-based head of international banking of ANZ group told Business Standard.

By that time, ANZ had already closed four "small representative" offices in Latin America, with the ongoing trade business being serviced from New York. "Our international strategy is to simplify and focus our international network, and improve its returns," Kupper added.

In May 1999, ANZ signalled its intention to simplify its international business and focus it on Asia-Pacific. Part of the unfolding deal was that on September 6, 1999 ANZ sold its retail stockbroking business to Salomon Smith Barney Australia.

And on April 27, 2000 it sold the Grindlays businesses in west and south Asia, and associated Grindlays Private Banking business for $1.3 (A$2.2) billion in cash.

Now it is no secret either that despite being amongst the oldest banks in India, Stanchart is not considered among the top players (see table). Nor was it considered aggressive enough for top-of-the-mind recall.

But Stanchart was playing to a different tune. Basically, while ANZ was pulling out of emerging market risk, Stanchart was building a business model around it.

Speaking on the acquisition, Stanchart group chief executive, Rana Talwar, said, "This acquisition is completely in line with our stated strategy and is a significant step towards our objective of becoming the world's leading emerging markets bank. It also emphasises our commitment to develop our business in the Middle East and South Asia region."

Stanchart recently acquired the international trade finance business of the Union Bank of Switzerland and Nakornthon Bank, Thailand. "We will continue to pursue opportunities to develop our unique franchise," Talwar said.

But it requires a lot CEO-talk to sell the strategy. After all, anyone who wants to increase risk in the emerging markets should have a saleable reason for that. Especially in India where it was the odd case of the smaller fish (Stanchart) taking on a bigger one (ANZ).

For starters, as the table shows, the combined entity will be the single largest foreign bank in the country. Citibank comes in at a distant second after having remained in the top position (ranked by total assets) for most of the post-liberalisation period. In the entire banking industry, the combine _ proposed to be called Standard Chartered Grindlays _ misses the top ten rankings by a very narrow margin. This, of course, is based on numbers at the end of March 1999. Both banks have refused to give out country-wise positions in the whole region, but obviously Stanchart must be looking at leading positions in key markets.

But are the gains sustainable? Bank analysts are not too enthusiastic about the effect the acquisition on the local banking industry. "Both banks have been slow movers and never been considered aggressive in any field. What remains to be seen is whether they are able to capitalise on the bigger balance sheet," said an analyst.

Their worst fear is that apart from the larger global risk that Stanchart is taking over, it may not be in a position to rake in commensurate returns for the simple reason that it is trying to straddle both corporate and retail banking at least in India.

The unsaid tenet in profit-motivated banking is that one can be a retail bank or a corporate bank, but not both. For instance, Bank of America wanted to dump its retail business while ABN Amro wanted to expand the line. Deutche Bank is another example of a tightly focused corporate bank.

Traditionally, Stanchart has largely been a retail-focused bank while ANZ has been a corporate bank. At one time, it is said, ANZ had all the country's top 500 corporate clients on its books. Stanchart would be looking to leverage ANZ's large corporate customer base of 700 as well as their expertise in corporate and structured finance. ANZ would gain from Stanchart's presence in the retail and credit card markets.

At the same time the major benefit of such an amalgamation is that the new entity would be able to cut costs, say analysts. This was also the idea propounded by the Standard Chartered chief at the time of the acquisition.

Even on the issue of size, analysts are sceptical about the period for which Stanchart Grindlays would be able to stay on top. Analysts say other banks, especially the new private sector banks such as HDFC Bank and ICICI Bank, are likely to outgrow this entity soon. Even among foreign banks HSBC and Citibank should retain their hold of the market in retail and credit card areas.

One other implication of this acquisition is that consolidation has been established as a reliable method of survival in the Indian banking industry. This is the second such deal between banks in India though the first one, between HDFC Bank and Times Bank in November 1999 is yet to stabilise.

It is possible now that other foreign banks also start evincing greater interest in the country. Earlier Chris Hothersall, deputy chief executive of HSBC in India, said, "If the 20 per cent ceiling for stake in banks were to be hiked to reasonably high levels, the bank would consider a merger with a well established public or private sector bank. Otherwise just picking up stake of 20 per cent in a bank would not be too exciting." On the other hand, we have Chase Manhattan Bank which already has a 15 per cent presence in HDFC Bank, India's largest private sector bank.

But it still looks unlikely that any other foreign bank would make a swift move in this direction. Bank analysts say most foreign banks would be interested in global synergies rather than local issues. Foreign banks have had a long presence in India although this is not reflected clearly in their market share in most banking areas. Stanchart is in fact, the oldest bank in the country (set up in 1858) and ANZ was established in 1892.

Neither of them have really emerged as a threatening player in the Indian banking industry. To be fair to these banks, the Reserve Bank of India ( RBI) permission for almost every new operation has also been responsible in stunting growth of foreign banks. But American banks, at the same time, have been able to carve niches for themselves in the country in the post liberalisation era.

Take the number of credit card holders that the combined entity of Stanchart and Grindlays will have at 1.05 million. This is less than 50 per cent of Citibank's number of credit card holders at more than 2.5 million.

ANZ Grindlays on its part has been up for sale for more than a year now. In fact the management team headed by Tony Singh had been appointed to affect a turaround in business last year. ANZ officials in Australia have expressed satisfaction over the results obtained in South Asia since then.

Their half-year financial results announced recently showed that profits in South Asia were up from AUD 36 million in the corresponding period last year, to AUD 43 million this year. Though this has not been enough for them to have avoided the sale.

There have been extensive media reports here about the interest evinced in their operations by some foreign banks. These included HSBC, Development Bank of Singapore, ABN Amro Bank and Citibank. What is not known, however, is that at least three Indian entities had also bid for ANZ's operations in India. These include two large financial institutions and the subsidiary of a leading nationalised bank.

However, the biggest area of concern would now be of how to manage the vast human resources that Stanchart will possess post merger. Around 3,300 ANZ Grindlays employees would be added to Stanchart's 1,650. The combined strength of both banks would result in a total of 58 branches with ANZ Grindlays contributing 39 of them.

The task at hand is going to be difficult since many of the functions would overlap. Departments in duplication would include treasury, retail and corporate banking. In fact, some of the branches would also be in duplication and some rationalisation could be expected. For instanceboth ANZ Grindlays and Stanchart have branches on M G Road and Santacruz in Mumbai.

Talwar has unequivocally stated in an internal meeting of bank employees that the process of selection of personnel would be fair and transparentand opportunities would be available to all.

For each of the main departments, joint integration teams are being formed and the final structure of the organisation would be decided accordingly. ANZ Grindlays' employees are as of now aware that the future is uncertain. Though the official spokesperson of ANZ Grindlays Bank just said, "The mood is not exactly exhilarating and it is still early stages for speculation."

John Filmeridis, CEO of Stanchart in India, had recently said that he has informed the RBI that Stanchart would be interested in acquiring a public sector bank in India as well if regulations permit him to do so. "The way the Indian economy is expanding, to succeed, we have to have size, scale and critical mass," he said.

Analysts point out that there could be no problem concerning capital resources for going through a deal like this for large foreign banks. The real problem would be in managing the large increase in number of employees that any public sector bank would provide.

This makes the human resource issue even tougher. In India, where trade union activity has always been high and militant in tone, issues such as layoffs or even voluntary retirement could be a daunting prospect.