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Australia and New Zealand Banking Group Limited (ANZ) is the second largest of the "Big Four" banks in Australia, trailing only National Australia Bank Limited. Worldwide, ANZ ranks as one of the top 100 financial services firms. The group offers a full range of retail banking services in its base countries of Australia and New Zealand, serving nearly four million customers through a network of some 900 branches and more than 1,500 ATMs. Additional retail banking operations are located in the Asia-Pacific region, including Indonesia and Hawaii. Other products and services include mortgage financing, consumer financing (ANZ is the number one credit card issuer in Australia), vehicle and equipment financing and rental services, wealth management, corporate banking for small, medium-sized, and large companies, investment banking, and foreign exchange and commodity trading. ANZ and ING Group of The Netherlands run a joint venture in funds management and life insurance called ING Australia Limited. ANZ was formed when the Australia and New Zealand Bank Limited (ANZ Bank) merged with the English, Scottish and Australian Bank Limited in 1970. ANZ Bank was the result of a merger in 1951 between the Bank of Australasia and the Union Bank of Australia.
19th-Century Origins of the Major Predecessor Banks
The Bank of Australasia (Asia) is believed to have been the idea of Thomas Potter Macqueen, a wealthy colonist who proposed a joint bank and whaling enterprise to some London investors, who liked his idea well enough to become the bank's first provisional directors. Macqueen, however, was caught promoting the rival Commercial Banking Company of Sydney behind the directors' backs, and the Bank of Australasia opened in 1835 without him.
The Union Bank of Australia was founded in a similar fashion. This time a struggling Australian bank, the Tamar Bank in Tasmania, went to London in search of capital and found a group of investors prepared to back a bank in the colony. They founded the Union, which took over the Tamar Bank and opened for business in 1837.
These two groups of investors based their hopes for the Asia and the Union on Australia's potential to meet the large demand for wool by English textile mills. Although some colonial banks already existed, none of these local institutions could match the financial resources of London-based, private trading banks like the Asia or the Union. Moreover, because these colonial banks were unable to tap the British capital market for another 30 years (except for the Commercial Banking Company of Sydney, which did give the British banks some competition), not one of them survived five years. In contrast, the Asia and the Union were immediately successful--the Asia quadrupled its loans between 1836 and the end of the decade.
In 1838 the New Zealand Company, a colonizing enterprise, approached both the Asia and the Union about opening a branch in the firm's new settlement. The Asia hesitated because it had reservations about the New Zealand Company. The Union agreed, however, and became the first bank to do business in New Zealand.
Between 1838 and 1841 the Australian sheep-farming boom reached new and feverish heights. During this period both the Asia and the Union consolidated their positions and built up businesses secure enough to withstand the severe depression that began in late 1841. Both banks had the financial strength to take advantage of colonial banks decimated by the depression: in 1840 the Union absorbed the Bathurst Bank, in 1841 the Asia acquired the Bank of Western Australia, and, in 1844 at the height of the depression, the Union merged with Archers Gilles & Company.
With the discovery of copper and lead deposits north of Adelaide in 1844, the colonies began moving out of the depression. The discovery of gold near Bathurst, New South Wales, in 1851 soon produced a general boom. In these new economic circumstances, gold and foreign-exchange dealing became significant banking services, and branch-banking programs flourished with the influx of new mining customers eager for mortgages.
During the "golden decade" of the 1850s, new banks formed to challenge the foreign-exchange primacy of the Asia and the Union, among them the English, Scottish and Australian Bank (ES&A), which was founded in 1852. Although the ES&A's presence concerned the Asia and the Union, an even greater threat came from the new colonial banks that burgeoned in the country at mid-century. To better compete with English banks, these colonial institutions established London offices of their own, while they also acquired enough colonial investment resources, mainly gold, to provide their own international banking. Thus, from this time on, the Asia and the Union had to share their international role both with new London-controlled banks and with strong colonial competitors.
Surviving the Late 19th-Century Bank Crash
Between 1860 and 1890 Australia saw prolonged and rapid economic development. But the conservative Asia and Union banks began to prepare for the inevitable downturn in the late 1880s; this letter from the secretary of the Asia, Prideaux Selby, to his superintendent, John Sawers, in July 1888 gives the flavor of the time:
[fs6][inr(18,0)]Lower rates. ... Let really sound customers feel that they do better by borrowing from us than by looking outside. Keep up rates to those we would rather be without and to those who can only give ordinary security. Sell dead securities while the boom lasts. Shake off speculators and doubtful customers. Do not look for immediate results. Give the seed time to germinate before looking to the harvest, and remember that unless the seed be sown and for the time lost to use, there never can be a harvest at all.
Both the Asia and the Union had steadily built cash reserves up to 20 percent of all liabilities to the public and remitted heavily to London rather than permit colonial loans to expand. Moreover, both banks had large floating advances to the money market and extensive and varied holdings of gilt-edged stocks from which they could draw in an emergency. Beyond this, they also had many informal connections with other financial institutions. Thus, during the great bank crash of 1893, both the Asia and the Union had a number of sources to turn to for help, including the Bank of England.
In the 35 years after 1853, 28 colonial banks began operations in Australia. Only six of these colonial banks reached the end of the century without temporary or final failure, and of the eight private trading banks that existed in 1850, only the Asia, the Union, and three others survived.
Many of the post-1850 banks failed because they were governed by over-optimism and an avid search for business without enough concern for security. They opened branch banks in small towns without assessing the costs closely, and they attempted to increase their loan portfolios quickly by minimizing risk factors. The Asia and Union never deviated from their conservative policies, but were cautious about opening new offices and circumspect in approving loans.
With the passing of the banking crisis, both the Asia and the Union attempted to increase their lowered earnings. Salaries were reduced and marginal branch banks were closed, except in western Australia, where gold discoveries promised great opportunities. But, more important than branch policy, both banks tried to restrain the unprofitable accumulation of deposits by cutting interest rates, which they believed would decrease the cost of funds and earn the banks more fees through the marketing of cheaper loans to customers. In 1895 both banks agreed to cut interest rates everywhere in the colonies to 3 percent, even though other banks did not follow.
Despite these measures to preserve profits, the Asia and the Union realized losses in loans to customers who had been devastated in the banking crisis. Although neither bank had missed a dividend payment at any time in its history, stockholders voiced concerns when rates of return fell markedly short of their expectations. Although these dividend results were similar for both banks, the Asia's board maintained confidence in Superintendent John Sawers and his staff, while the Union's board resolved that General Manager David Finlayson should retire.
Expanding in the Early 20th Century
By 1900, the Asia held 12.7 percent of all deposits and 9.3 percent of all advances, and the Union held 12.1 percent of all deposits and 10.6 percent of all advances in Australia, and both were members of Australian banking's Big Four banks (the Bank of New South Wales and the Commercial Banking Company of Sydney were the other two). The other 17 banks in the country were substantially smaller and confined to one or two colonies. Thus, at the beginning of the 20th century the Asia and the Union enjoyed relative strength and prestige throughout the Australian Commonwealth.
In the first decade of the new century, a stable economy prompted both the Asia and the Union to pursue policies of "complacent growth" through branch bank expansion. Between 1900 and the outbreak of World War I, the Asia opened 73 branches and the Union opened 100. Their competitors, still suffering from the banking crash and the depression, had to worry about reconstruction obligations; their relatively small and weak condition dictated a strategy of mergers and absorption rather than branch banking in the battle for market share.
One major issue for both the Asia and the Union in the early 1900s was their relationship with their head offices in London. Better communications and new personalities in London caused a marked shift in formal executive authority from Australia to Britain. London executives began demanding more intimate details and more informed advice than the general commentaries from Melbourne that they had drawn on for broad policy directives during the 19th century. Understandably, Melbourne executives resented their newly subordinate positions. In the end, the transfer of total executive power to the London offices was facilitated by a new policy of elevating older, more conservative executives to the top ranks in Melbourne.
With the inauguration of Australia as a commonwealth in January 1901, pressure intensified for a government bank. After much debate and discussion, the Commonwealth Bank opened in January 1913. It offered savings accounts, government banking, public debt management, and rural credit, but it could not issue notes and did not have central bank control. Top executives at both the Asia and the Union were highly critical of and hostile to the Commonwealth Bank. But executives in London took a more balanced view, and both boards refused to contribute to campaigns against the government's bank, although several colonial banks had done so. Further, they directed their chief executives to accept the situation and cultivate amicable relations with the Commonwealth's president.
World War I crystallized the banking structures existing in 1914. After the war, however, rivals of the Asia and the Union began to merge to make themselves more competitive. In 1917 the Royal Bank of Queensland and the Bank of New Queensland merged to form the Bank of Queensland; by 1932, when the Bank of New South Wales absorbed the Australian Bank of Commerce, 11 amalgamations had occurred, reducing the number of Australian trading banks from 20 to 9. During this period the ES&A merged with three other banks: the Commercial Bank of Tasmania in 1921, the London Chartered Bank of Australia in 1921, and the Royal Bank of Australia in 1927.
The Asia and the Union continued to expand their branch banking in an attempt to offset their competitors' growing advantages. Between 1918 and 1929 the Asia opened 49 new branches and the Union opened 41. Although both banks could have benefited from mergers with banks in areas such as Tasmania where they were not strong, both kept to the conservative policies that had been in place since the turn of the century until well into the 1920s.
Merger of the Asia and the Union, Forming ANZ Bank, 1951
In London, executives of both the Asia and the Union were aware that their banks had to change strategy if they wanted to rise in rank. Unfortunately, between the Great Depression and World War II, immediate problems took precedence over long-term rebuilding. There was some discussion about a merger between the Asia and the Union during the 1930s, but it was not until 1943 that serious interest in the project revived. At that time, both the Asia and the Union were approached by other Australian banks as possible partners. But each thought of the other as the most natural candidate for a merger.
On its own, each bank was less than half the size of the Bank of New South Wales, the largest bank in the country. They both agreed that a merger would make them more competitive, and also would restore lost stature and prestige. Moreover, if they did not act, it seemed likely that they would be left behind as their smaller competitors did merge.
In addition, both were English corporations, with London head offices and a majority of English shareholders, and their scales and styles of business were quite similar. The Union's strength in pastoral business complemented the commercial and industrial emphasis of the Asia. Only 70 out of 420 branches overlapped. Friendly cooperation within competition had characterized the relationship between the two banks for more than a century.
In 1946 lawyers began work on the details of a merger in which the Asia took over the business of the Union. But while a government threat to nationalize nongovernment banks delayed any action, it was decided that the original merger proposal was too costly. In addition, a group of key Union executives, feeling that the banks were equals and should join accordingly, began to resist being absorbed by the Asia. The solution was to create a new company, the Australia and New Zealand Bank Limited, to subsume both the Asia and the Union. ANZ Bank began business on October 1, 1951.
The merger of the Asia and Union catapulted ANZ Bank to the top tier of banks in Australia and New Zealand. Unfortunately, being bigger failed to make ANZ Bank more profitable. A tight government liquidity requirement forced the bank to cut lending in order to build liquid assets to the prescribed level. To offset the lost loan business, ANZ Bank began looking for new programs to raise profits and reduce expenses. A savings bank subsidiary, which could use existing skills and facilities and be funded within the governments' constraints, was established in 1955. The Australia and New Zealand Savings Bank Ltd. proved very successful.
While ANZ Bank's administrative hierarchy became more efficient in the early 1960s, General Manager Sir Roger Darval decided that emphasizing the bank's domestic business would boost profits. He began an accelerated expansion of branch banking. ANZ Bank opened 127 branches in six years; of these, 112 were in central business districts, signaling ANZ Bank's intent to move away from rural business.
Creation of ANZ Through Merger of ANZ Bank and ES&A, 1970
ANZ Bank had wooed the English, Scottish and Australian Bank four times since 1955. ES&A's conservative controls over lending and liquidity, its highly successful hire-purchase subsidiary, Esanda, and its profit-oriented administration all appealed strongly to the board of ANZ Bank, and ES&A came from the same private trade banking tradition as both the Asia and Union. But most of all, the directors thought that a bigger bank would command more resources than either organization could raise itself. In addition, some feared that foreign banks would move in on ANZ Bank's corporate and international business, possibly by using ES&A as a host for entry.
In 1970 the merger finally took place. The resulting Australia and New Zealand Banking Group Limited became the third largest bank in the commonwealth, double the size of the fourth-place bank. Unfortunately, despite its expanded presence in the marketplace, ANZ saw its profits fall and its expenses rise during its first years, primarily because of a lax administration and unexpectedly high merger costs.
Both ES&A's and ANZ Bank's staffs had opposed the merger, each side fearing it would lose out on the distribution of the higher posts in the new bank. Angered by this situation, the board hired a U.S. management consultant firm in 1973 to help its executives redesign the ANZ Banking Group's organizational structure. A modern formalized planning system specifying long- and short-range goals emerged, creating an effective and efficient environment at last. At the same time, the consultants replaced traditional profit goals with goals tied to rates of return on assets. The group's executives felt that this change required a large amount of capital immediately. When London objected to the exportation of British capital, the group's board realized it would be in the best interests of the bank to change its domicile. After 141 years, the headquarters of ANZ was transferred from London to Melbourne on February 2, 1976, and two years later ANZ moved into the newly constructed ANZ Tower, a symbol of the total transformation in structure, philosophy, and character the bank had undergone.
International Acquisitions in the 1980s
During the early 1980s monetary authorities in Australia and New Zealand gradually began to relax the controls that had limited banking operations since the 1950s. This, together with a strenuous program of cost-cutting, led to a substantial increase in profits. But deregulation of the industry also opened Australia and New Zealand to foreign banking. In response to this foreign competition, as well as increased domestic competition, ANZ decided to try to buy strength and diversity. In 1979 it merged with the Bank of Adelaide. In 1981 ANZ talked to the Commercial Banking Company of Sydney and then the Commercial Bank of Australia about merging, but neither deal worked out. In 1983 and 1984 the group did succeed in acquiring or buying half equity in the Development Finance Corporation; the Trustees, Executors and Agency Company Ltd.; McCaughan Dyson and Company, a stockbroker; and Grindlays Bank plc, of England.
The 1984 acquisition of Grindlays, with representation in 40 countries, greatly strengthened ANZ's international operations, compelling it to redesign its organizational structure. The bank's hierarchical arrangement of authority was replaced with a horizontal structure of more than 50 business units worldwide. These independent business units brought an entrepreneurial spirit of creativity and ambition as well as increased profits.
Although the bank's 1980s acquisitions, including the 1989 purchase of New Zealand's PostBank, which made ANZ the largest banking group in New Zealand, made it a major international financial player, the group was still, in large part, a regional organization; in 1989, 77 percent of its profits came from operations in Australia and New Zealand.
Failed Mergers and Tough Economic Times in the Early to Mid-1990s
During 1989 ANZ and National Australia Bank, one of the other Big Four Australian banks, entered into serious discussions about a merger, going so far as buying small stakes in each other. But the Labor government, worried about Australians' increasing concern about the power of the big banks in the run-up to a general election to be held in March 1990, blocked the deal. Then almost immediately after Labor's victory in the election, ANZ announced that it planned to purchase majority control of National Mutual Life Association, the number two insurance company in Australia. At A$3.8 billion (US$2.87 billion), it was valued as the largest merger in Australian history, and it promised to rock the nation's banking sector by forming its biggest financial services outfit, which was to be called ANZ-NM Banking and Insurance Group. Once again, however, the Labor government blocked the deal, with Treasurer Paul Keating reasoning that allowing the merger would lead to a series of further mergers within the Australian financial services industries, which as a whole would undermine competition. ANZ was allowed to acquire National Mutual Royal Bank Limited, a joint banking venture between National Mutual and the Royal Bank of Canada that was formed in 1986 and had assets of A$4.5 billion. Also acquired in 1990 were Perth-based Town and Country Building Society, Lloyds Bank PLC's operation in Papua New Guinea, and Bank of Zealand's Fiji unit.
Moving beyond the failed mergers of 1989 and 1990, ANZ struggled through the difficult economic environment of the early 1990s--a deep recession that in Australia included high unemployment (peaking at 11 percent) and high inflation and interest rates as well. The stagnation led to an explosion in nonperforming loans, forcing ANZ and other Australian banks to take huge provisions against bad debts. The nadir for ANZ came in the year ending in September 1992 when provisions of A$1.9 billion (US$1.3 billion) led to a net loss for the year of A$579 million (US$399.3 million). ANZ also made staffing reductions during the recession, announcing the elimination of 5,500 jobs in late 1991. During 1992, a new management team was put in charge of turning around the group's fortunes: John Gough took over as chairman from Milton Bridgland, and Don Mercer succeeded Will Bailey as chief executive. Gough was chairman and former managing director of the Australian conglomerate Pacific Dunlop Limited, while Mercer had joined ANZ in 1984 and had most recently served as head of Australian retail banking.
As the economy slowly recovered and ANZ returned to profitability, ANZ restarted its overseas expansion, concentrating primarily on east Asia. In 1993 the group gained a presence in Indonesia by purchasing an 85 percent interest in a joint venture bank that was later renamed PT ANZ Panin Bank. That year also saw ANZ become the first bank from an English-speaking country to be allowed into the Vietnamese market, opening a branch in Hanoi and a representative office in Ho Chi Minh City. Similarly, the bank entered China by opening a branch in Shanghai and offices in Beijing and Guangzhou. By 1994 ANZ was the largest foreign bank in south Asia, and 10 percent of the bank's total profits were being generated through its Asia-Pacific network. Late in 1995 ANZ expanded into the Philippines by opening a commercial banking branch in Manila. Another change to its overseas network came in 1996 when the domicile of Grindlays Bank was moved from England to Australia, and the subsidiary was renamed ANZ Grindlays Bank Limited. Meanwhile, in August 1995, Gough was replaced as chairman by Charles Goode, who was also chairman of Woodside Petroleum Ltd.
Late 1990s and Beyond: Major Restructuring Under McFarlane
Just after the Asian economic crisis began to unfold in mid-1997, ANZ made another management change. Board dissatisfaction with the slow pace of cost-containment efforts led to Mercer's retirement. Hired as his replacement was an American-trained Scottish banker, John McFarlane. The new CEO had 18 years of experience at Citibank on his resume followed by four years at Standard Chartered PLC, a leading international bank based in the United Kingdom, where he managed much of the bank's overseas operations, including those in south Asia. McFarlane led a thorough restructuring of ANZ's operations.
Under his leadership, the group began reducing its exposure to certain volatile foreign markets that were hit hard by the economic crisis and its aftereffects. In 1998 ANZ closed its London-based capital markets division and emerging markets business following heavy losses on emerging market debt trading. Reflecting a pullback from both international markets and investment banking, the group's investment banking arm was relocated from London to Sydney. McFarlane also worked to strengthen the bank's position domestically by accelerating the cost-cutting program and cutting staff; the workforce was slashed by more than 5,000 from 1997 to 1998. Further changes centered on the mix of domestic operations. Traditionally, ANZ had been more of a commercial/corporate bank, and McFarlane began to bolster the bank's domestic retail banking activities to create more of a retail/commercial bank. By early 1999 conditions in Asian markets had improved enough to permit a cautious return to expansion, and ANZ Panin Bank bought the credit card operations of PT Papan Sejahtera, an Indonesian bank that had fallen into receivership.
During 2000 McFarlane further reduced ANZ's exposure to risky foreign markets by selling ANZ Grindlays and its banking network in the Middle East and south Asia to Standard Chartered for A$3.1 billion. ANZ also began laying the foundation for a takeover of St. George Bank Ltd. by buying a nearly 10 percent stake in the New South Wales-based regional bank. This bid for domestic growth was scuttled in early 2001 after it became clear that it would not be possible to complete a friendly takeover at a reasonable price. ANZ then continued on with an organic growth model, centered around a reorganization that McFarlane announced in July 2000. ANZ divided itself up into 21 highly autonomous units (later reduced to 16), each of which would have to establish its own competitive position and develop its own growth strategy, as well as develop a mix of Internet and branch-based distribution. The units, for example, focused on personal banking in Australia, mortgages, wealth management, small to medium-sized businesses, institutional banking, and global foreign exchange. This decentralized structure ran counter to the prevailing model in the financial services that emphasized cross-selling opportunities through integrated operations. McFarlane felt, however, that the future of financial services lay in specialist players rather than generalists. The new ANZ structure also held the advantage of making it easier to shut down or sell off underperforming operations, as well as take successful units public or set them up within joint ventures with other companies.
ANZ did not completely abandon acquisitions but was now seeking smaller, "in-fill" deals. Late in 2001, for example, the bank bolstered its Asia-Pacific retail banking unit through the purchase of the Bank of Hawaii's operations in Papua New Guinea, Vanuatu, and Fiji for about A$100 million. Then in May 2002 came the first major joint venture deal to follow the new growth formula. That month ANZ combined its Australian and New Zealand funds management operations with ING Group's funds management and life insurance businesses in Australia and New Zealand, forming ING Australia Limited. The new venture was 51 percent owned by Netherlands-based financial services giant ING and 49 percent by ANZ, but the two owners were to have equal say in the management. ING Australia instantly became the fourth largest retail funds manager in Australia, with A$38.4 billion of funds under management, and the number five life insurer. The main point of logic behind the deal was that it would bring together ING's funds management experience with the power of ANZ's bank distribution channels.
Through 2002, McFarlane's thorough if unconventional restructuring efforts were paying off. ANZ reported record net profits that year of A$2.32 billion (US$1.26 billion), a 16 percent increase over the preceding year. Out of the group's 16 specialized units, 14 of them showed an increase in profits for the year. Seeking to continue this growth trend, ANZ was aiming to strengthen its domestic positions in several areas, including personal banking, mortgages, small to medium-sized businesses, and wealth management. The bank was also searching for expansion opportunities in the Pacific region and to a lesser extent in Asia. Maintaining a low risk profile was another key component of McFarlane's formula for success.
Principal Subsidiaries: ANZ Cover Insurance Pty. Ltd.; ANZ Executors & Trustee Company Limited; ANZ Funds Pty. Ltd.; ANZ Lenders Mortgage Insurance Pty. Limited; ANZ Holdings Pty. Ltd.; ANZ Investment Holdings Pty. Ltd.; ANZ Life Assurance Company Limited; ANZ Managed Investments Limited; ANZ Properties (Australia) Pty. Ltd.; ANZ Securities (Holdings) Limited; Australia and New Zealand Banking Group (PNG) Limited (Papua New Guinea); Esanda Finance Corporation Limited; ANZ Capel Court Limited; PT ANZ Panin Bank (Indonesia; 85%); US Distribution Trust I; US Distribution Trust II; Alliance Holdings Limited; NMRSB Pty. Ltd.
Principal Operating Units: Personal Banking Australia; Personal Banking New Zealand; Personal Banking Asia-Pacific; Mortgages; Consumer Finance; Wealth Management; Small to Medium Business; Asset Finance; Corporate Banking; Institutional Banking; Global Capital Markets; Global Foreign Exchange; Global Structured Finance; Global Transaction Services; Corporate Financing and Advisory; Group Treasury.
Principal Competitors: National Australia Bank Limited; Commonwealth Bank of Australia; Westpac Banking Corporation.