Analysts say culling of National Bank brand shows NZ no longer a growth market for ANZ and the NZ$100 mln cost is hard to justify

By Gareth Vaughan

ANZ's plan to phase out its National Bank brand over the next two years proves the group's management no longer views New Zealand as a growth market, will lead to some loss of customers, and the NZ$100 million it's costing is hard to justify, banking analysts say.

However,  ANZ New Zealand CEO David Hisco rejects the view that ANZ management no longer sees growth in the New Zealand market.

In a research report Sydney-based JP Morgan analysts say the demise of the National Bank brand, nine years after ANZ bought its rival from Britain's Lloyds TSB in 2003, confirms ANZ management's views the New Zealand market as "ex growth" given the strategy under the previous dual branding proposition was about obtaining greater "natural market share" and having a better platform for customer acquisition.

"Clearly this approach hasn't worked, with combined share declining from 40% in 2002 to 36% in 2006, continuing on a downward trajectory to 31% today," JP Morgan's Scott Manning, James Nicholias and Bharat Anand say in their report. "(But) importantly it is worth noting that the 25% of New Zealand earnings that come from the institutional bank remain unaffected."

The JP Morgan analysts argue that killing off the National Bank brand is about re-calibrating ANZ's cost base to a lower revenue growth outlook to ensure New Zealand remains a profitable market. They say ANZ currently has A$9 billion of capital invested in New Zealand with last year's record annual underlying profit of NZ$1.243 billion (which the bank is on track to beat this year), delivering a 14% return on equity (RoE).

However, if the "sunk cost" of goodwill in ANZ's New Zealand operations, dominated by NZ$3.3 billion stemming from the National Bank acquisition, is stripped out, ANZ NZ's retail, commercial and wealth operations generated a 23% RoE, and its institutional business a 31% RoE.

The JP Morgan analysts estimate ANZ could cut its New Zealand cost base - its annual operating costs last year were a fraction under NZ$1.5 billion - by NZ$100 million. They add that much of the "heavy lifting" has already been done through the alignment and simplification of products, risk scorecards and management layers, with systems and brands the last piece of the puzzle. However, they argue this hasn't been cheap with more than NZ$500 million of charges taken.

Investment is a 'vote of confidence' in NZ

Hisco told interest.co.nz that given the amalgamation of the two brands is seeing ANZ invest NZ$100 million this is a "vote of confidence" in New Zealand.

"We're expanding into 15 new communities and we think there are communities we should be in that we haven't been in because we were stymied by saying 'do we open a green and a blue branch or which one do we do?' We have a view that there's real opportunity for us," Hisco said.

"We're building a stronger, more competitive bank and so we don't have a mindset that it's ex-growth, and neither do my front line teams and neither do their targets reflect that," added Hisco.

He also said the ANZ and National banks had been running the "competitive model" they're aiming to run with as one bank since the start of the year and had grown market share in mortgages, deposits, business banking and credit cards

"We've got a lot of people joining us because they like what they see," Hisco said. "We're approving more than one in three home loans for Kiwis now. Our goal internally is if we've got our product mix right, and our proposition looking pretty good, well then we should be able to grow."

Return on investment questioned

Meanwhile, Deutsche Bank analysts James Freeman, Andrew Triggs and James Wang, also based in Sydney, say that whilst the move to one brand was inevitable, ANZ's return on its NZ$100 million investment on branch rebranding and repositioning seems limited given a small number of branch and staff reductions. Hisco says the group's branch network will fall to about 280 from about 300 and just a few full time jobs will go.

The Deutsche Bank analysts note that, combined with putting the ANZ and National banks on to one IT platform, something due for completion next month, ANZ is spending NZ$340 million integrating and improving efficiency in New Zealand. And, given the strength and popularity of the National Bank brand, it's likely to lose at least some customers.

"If we assume National Bank makes up 50% of ANZ's NZ revenue, then every 5% attrition in the National Bank revenue will result in a 6% reduction to the NZ division profit and 0.9% reduction to group net profit after tax which is not insignificant," Freeman, Triggs and Wang suggest.

They note, however, that from a cash, or underlying, earnings perspective the impact of the ANZ NZ changes is likely to be favourable given the accounting treatment of taking the NZ$100 million of costs below the line, meaning these costs won't hit ANZ group cash profit, but the future benefits will benefit it. Banks' taking such costs 'below the line" is controversial and unpopular with some analysts.

Freeman, Triggs and Wang question whether the changes in New Zealand will be of benefit to ANZ shareholders.

"Given the large investment, we do need to see a material improvement in the cost outcome in this business to justify these investments from the shareholders' perspective which may be challenging," the Deutsche Bank analysts add.

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