ANZ Investor Call 31 October 2016

Transcription

1 Start of Transcript Operator: Thank you for standing by and welcome to the ANZ investor call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you would like to ask a question, please press the star key followed by number 1 on your telephone keypad. I would now like to hand the conference over to your first speaker today, Jill Campbell, Group General Manager, Investor Relations. Please go ahead. Jill Campbell: Thanks, Jane and welcome everyone. Thanks for joining us at short notice for the ANZ conference call and audio cast regarding the announcement this morning of the sale of our retail and wealth businesses in five countries to DBS Bank. On the call this morning are ANZ CEO Shayne Elliott, who is in Hong Kong, and ANZ CFO Michelle Jablko who is here in Melbourne. They will speak briefly and then we'll move pretty quickly to Q&A. Prior to handing over, just for clarification I'll remind everyone that ANZ is scheduled to release its FY16 financial results this coming Thursday, November 3, and so we'd ask that any questions be confined to this transaction and any others we'll hold over to Thursday. Also, while we welcome any media listening to the call this morning, I would ask that you please hold your questions until the media conference a little later today. The call today will be available on delay both by phone and as an audio cast on our website, and the transcript will be made available as soon as possible today. With that, I'll hand over to Shayne to open. Thanks, Shayne. Shayne Elliott: Thank you, Jill and welcome, everybody. As I outlined to you at the halfyear result in May, ANZ has a strategy in place to simplify our business and focus only on those areas where we have a long-term sustainable competitive advantage. That focus is based on our core business of retail and commercial in Australia and New Zealand, and institutional supporting regional trading capital flows. Today I'm pleased to announce the sale of our retail and wealth businesses in five Asian markets - China, Hong Kong, Taiwan, Indonesia and Singapore - to DBS. This is a major milestone and reshaping our portfolio and building a better-capitalised, better-balanced Bank. Through acquisition and organic growth, we have built a profitable retail and wealth business in Asia that serves 1.3 million customers but over the past eight years regulatory changes, the competitive landscape and the need for us to focus our resources means we are no longer the best owner for these businesses. DBS will inherit a good business and DOCUMENT TITLE Page 1 of 14

2 they are a capable and experienced operator. It's a good outcome for us and our Asian customers. I want to emphasise though that we are committed to our presence in Asia and the presence we have built in 15 Asian markets. This transaction allows us to focus our resources, be they capital, technology or talent, on running a capital-efficient world class institutional business in Asia where we have sufficient scale and a sustainable competitive advantage. Mark Whelan, Farhan Faruqi and their team have made huge progress this year in reshaping institutional around that aspiration and we'll talk more about that at our fullyear results on Thursday. For now, I'll hand over to Michelle to walk you through the transaction itself. Michelle. Michelle Jablko: Thanks, Shayne. I'll particularly draw everyone's attention to slides 4 and 5 of the investor pack that has been circulated this morning. The five countries being sold represent around $11 billion in gross loans and advances, $7 billion in credit risk-weighted assets, and $17 billion in deposits. DBS is acquiring assets and deposits at that completion. DBS will also take more than 80% of the people directly attached to the businesses and most branches. DBS will pay a premium above book value of $110 million as well as the market value of property as at the time of sale. In 2016, the businesses generated around $825 million in revenue and $50 minimum in profit. Included in this was approximately $160 million in provision charges and a little over $600 million in operating expenses. This transaction remains subject to regulatory approval and has no impact on the 2016 financial year. Sales of the five countries will occur progressively over the next 18 months, with three of the five currently expected to occur during the second half of the 2017 financial year, and the remaining two in the first half of financial year The financial impacts of the transactions will come through progressively over the next 18 months. Over that time, the assets and liabilities of the business might vary, although the premium of $110 million is mostly fixed, assuming current exchange rates. As completions occur, the sale will improve the Group's CET1 ratio by 15 to 20 basis points and by around 30 basis points on an internationally comparable basis. From a P&L perspective, transaction proceeds will not fully offset impairments of software, goodwill and fixed assets as well as transaction and separation costs. The net impact of this is expected to be around $265 million. The impact will be a bit higher in the first half of financial year 2017 but offset in subsequent periods. In addition, there will be an DOCUMENT TITLE Page 2 of 14

3 ongoing impact to revenue and operating costs with positive implications for the Group's provision charge as completion of each of the countries takes place progressively over the next 18 months, starting in the second half of financial year Based on current expectations for completion timing, in an annualised sense, around half the revenue, a third of provisions and 60% of direct costs will leave with the business in the second half of financial year 2017 with the remainder to follow in the first half of financial year '18. In addition, there will be an amortisation fading from the impairment of software, which will be around $30 million per annum, commencing in the first half of FY17. Indirect or Group costs that are allocated to the business represent around 55% of the overall cost base and will roll off more slowly. These will be considered as part of the Group's overall cost program and most are expected to be gone over the next two to three years from now. Beyond the one-off impact in the first half of 2017, the ongoing impact on EPS and ROE is small. I will now hand back to Jill for Q&A. Jill Campbell: Thanks, Michelle; thanks, Shayne. Jane, with that I'll hand over to you to open the questions, please. Operator: Thank you. If you would like to ask a question, please press the star key then 1 on your phone and wait for your name to be announced. The first question today comes from Victor German of Macquarie Bank. Go ahead please. Victor German: (Macquarie Bank, Analyst) Thank you. I was just hoping to clarify a couple of things around financials and also interested in your thoughts around impact from rolling off of those deposits that you have in that franchise on your broader business in Asia and also on the NSFR ratios. Just in terms of [unclear] financials, I understand there is impact on goodwill in terms of the negative implication in '17, yet you're saying that you're selling at a premium to book value. Where is that coming from? Michelle Jablko: Why don't I take that. So let me talk through - I'll talk through the numbers. So in terms of impairments, there's a total impairment in the first half of 2017 of about $250 million of which software is around two-thirds and the rest relates to goodwill and fixed assets. In addition, we'll take a provision for redundancies and branch closures. That's about $45 million. Offsetting that we'll over time, so as the transactions complete, there'll be the DOCUMENT TITLE Page 3 of 14

4 premium of $110 million to come through, as well as some additional separation and transaction costs that are also $110 million. So those two numbers effectively net each other out. As I said when I was going through my talking points, we'll also receive the market value of property. So if you take all of those together, the net impact is $265 million. Victor German: (Macquarie Bank, Analyst) Right, and that $265 million is essentially the impact on NTA then? Michelle Jablko: So part of it is so the $250 million is and the rest is provision for costs. Victor German: (Macquarie Bank, Analyst) Right and then - Michelle Jablko: To take your funding question, so firstly I'd say the transaction, given the completion timing, the deposits will roll off with the business so there's a bit of time, but as we look at it it doesn't have any material impact on our overall Group funding or at SFR. Victor German: (Macquarie Bank, Analyst) Right, okay. Okay, because in the past you've said that you're comfortable with over 100% that nothing changes on the back of this transaction, excluding obviously the benefit that you've got from recent regulatory announcement from APRA. Michelle Jablko: Look we can go through that in more detail on Thursday. Victor German: (Macquarie Bank, Analyst) On the result, okay. Michelle Jablko: Yeah, on the result. Victor German: (Macquarie Bank, Analyst) Then just lastly, so Michelle you talked a little bit about expenses and indirect costs. Now the $50 million of financial impact am I right to assume that that excludes the indirect costs, and ultimately as you reduce indirect costs the benefit is going to be bigger for the Group. How shall we think about those indirect costs? Michelle Jablko: So as I look at the indirect costs, the indirect costs are around 55% of the $600 million of costs. Victor German: (Macquarie Bank, Analyst) Right. Michelle Jablko: Yes. Of that as the transactions complete we'll probably have a relatively small reduction in that in the second half of '17. There will be some, but over time - so over the next two to three years - we would expect most of those costs come out. DOCUMENT TITLE Page 4 of 14

5 Within the provisions I've spoken about, so the $45 million for redundancies and branch closures and the $110 million of transaction separation costs over time, we've incorporated the costs of getting most of those out. Victor German: (Macquarie Bank, Analyst) Right, okay. Okay, thank you. Operator: Thank you. The next question comes from Jarrod Martin at Credit Suisse. Go ahead please. Jarrod Martin: (Credit Suisse, Analyst) Yes, good morning, a couple of questions. So this is sale for five of the countries so there's nine countries that you have this type of business in. So what's happening with those businesses or is that part of the $45 million that you've just mentioned? That's the first question. The second question - if you look in your first half accounts for Asian Retail and Pacific, the business which this represents from what we can see here probably three-quarters of it, there was a profit of $53 million. You're saying the full-year profit for the business is approximately $50 million. Does that mean that second half effectively didn't make any money? Then looking at the DBS presentation they say they think this business will make $200 million within three years. So I just wanted to try and understand have you been forced to effectively provision this up to make it saleable? Shayne Elliott: So, no, we haven't been forced to provision up to make it saleable. The difference between the $50 million and the $53 million et cetera is the $50 million that we're talking about here it's slightly less than $50 million that the five countries make. It's only those five as opposed to the whole of Asia Retail and Pacific, so it's slightly different comparisons and Michelle may give you some more detail on that. You're right that we're talking about five countries here not the nine. The other countries that are missing from this are Cambodia and Laos, and as you know Cambodia is actually subject to - it's a joint venture rather than a fully-owned franchise. Laos is very small. The Philippines is not included in this, but the most material country that's not in here is Vietnam. Essentially what we're doing is we've reached an agreement on these five. That's really, really important. This is the heart of the business and we're continuing to look at the other franchises. So that date I'm not committing to one way or the other but we are continuing to look and conduct our reviews on those four remaining franchises. DOCUMENT TITLE Page 5 of 14

6 I mean it is our intention, as I think we've made clear - we don't see a future for us in retail and wealth businesses across Asia and we will exit at the right time. Jarrod Martin: (Credit Suisse, Analyst) Michelle if you could comment on that second-half profit and then the $200 million DBS target earnings? Shayne Elliott: Well maybe I could - can I just take the - I'll just take the $200 million DBS thing. Look what I think that's really interesting and is good about this deal is the deal works for both the seller and the buyer for the same reason, and that is it's essentially a scale issue. As you know, we - so DBS operates in all of those markets that they're acquiring businesses. Some bigger than others. They're buying the assets and liabilities and essentially getting a customer base. They've already got established systems in place, so it's a way to then leverage their fixed costs base that they've already made. As we know, they're a high quality operator, they've got some good digital capability, and if they run this thing well they can do very well with it. It's a good business. Similarly, if we were to have acquired somebody of equal size and got some scale benefit we could probably do the same. So it's not a - there's no difference in that; it's really just a question of prioritisation. It's just not the - it's not our number - it's not the best thing that we can do with our resources. So I think it's very possible they can generate that kind of number from their franchises over time if they run it really well and leverage their existing technology and fixed cost base. So Michelle do you just want to talk about that second half issue because I think it's largely just comparing an apple and an orange here because of the five countries rather than - Michelle Jablko: Exactly. It's all because included in the first half number you've got the Pacific in there as well, as well as some of the other businesses that aren't sold. So that's all that's driving that. Jarrod Martin: (Credit Suisse, Analyst) Okay. Operator: Thank you. The next question comes from Brian Johnson of CLSA. Go ahead please. Brian Johnson: (CLSA, Analyst) Thank you very much. Michelle, I'm just a little bit confused. On slide 5 you've got residual expenses relating to indirect and centrally allocated costs still flowing through in Now I suppose what I'm interested to know is DOCUMENT TITLE Page 6 of 14

7 everything that you've disclosed today is this going through specified items or even basically through some kind of abnormal expenses? So does this impact cash earnings? Michelle Jablko: So the numbers I've gone through with you today are not in specified items. Firstly, nothing impacts Maybe it'll be easier Brian if I just go through the numbers one more time and just step through half on half on half for the next three halves what comes through. Brian Johnson: (CLSA, Analyst) Yes. Michelle Jablko: So if you start with the first half of this financial year of '17 we have the impairment of $250 million I spoke about. Brian Johnson: (CLSA, Analyst) Yes. Michelle Jablko: We've got - that gets offset by an amortisation benefit so half the $30 million, about $15 million, as well as a provision for redundancies and branch closures which is $45 million. So that's the first half. We'll continue to own the businesses in that time so there's no ongoing P&L impacts in the first half. If you go to the second half of '17, we've got the second half of that amortisation benefit so another $15 million. We've got some benefit coming through from the market value of properties. That's probably another $15 million spent. Somewhat depends on which properties transfer at which time. Then we start to take out the revenue and costs associated with the businesses. So in terms of revenue, on an annualised basis it's about 50%. So take half of that and then average that in the half. In terms of direct costs it's on an annualised basis about 60% of the directs, and then we will get out some of the indirect costs at that point. If I go to the first half of '18, in terms of the transaction impacts, it's about the same as what I said about the second half of '17, so the same sort of amortisation benefit and the same for the market value of the properties. In terms of revenue it'll be the other 50% roughly that comes out and 40% of the direct costs, so the remaining direct costs, and we will start to get out more and more of the indirect costs over the first-half of '18 and beyond. So that most of the indirect costs will be gone over the next two to three years. They won't all and the reason they won't all is there is allocation of group costs, so just real group costs that have nothing to do with the business that are allocated so there will be some left. DOCUMENT TITLE Page 7 of 14

8 Brian Johnson: (CLSA, Analyst) But Michelle - what I don't get, Michelle, though is you've sold the business. You've got some costs associated with it which are presumably sitting in the head office. Michelle Jablko: Mm-hm. Brian Johnson: (CLSA, Analyst) So those costs that you've still got on-board from slide 5 they're still being adjusted out so they relate to this transaction, but the real dollar costs that shareholders are paying in the business has gone. Shouldn't that be going through the cash earnings? Shayne Elliott: They are going - can I just jump in? Michelle Jablko: It is going through cash earnings. Shayne Elliott: It is going through cash. Michelle Jablko: It does go through cash, yes. Brian Johnson: (CLSA, Analyst) So what you're saying in that slide basically is that there is a timing delay before you can get all the costs out associated with the business - Shayne Elliott: Yes. Michelle Jablko: Yes. Brian Johnson: (CLSA, Analyst) - but it is dragging on cash earnings? Michelle Jablko: Yes, that's right. Brian Johnson: (CLSA, Analyst) Okay. Shayne Elliott: Hey can I just jump in on the specified - and that's exactly right, Brian. The issue about specified items by the way is we're not trying to get a free kick here. This is all going into cash earnings. One hundred per cent above the line all of it; losses, profit, indirect, direct, the whole lot. All we're trying to do - the only reason we use this concept of specified items is to try to give investors clarity of the impact of these more strategic decisions and things that are changing and the underlying business, but at the end of the day we run the whole thing and we're accountable for all of it. All of it will impact EPS. All of it will impact ROE. So we're not trying to fudge any of that, but we're just trying to say look if you're wanting to look through it and understand what's happening to the rest of real business that we're going to hold onto, that's that adjusted pro forma piece. DOCUMENT TITLE Page 8 of 14

9 But we're totally accountable for this and the point of the slide - and Michelle's absolutely right - it's just to say there's going to be a timing issue. Some of those indirects just take a little bit longer to get out. Michelle Jablko: Yeah, [unclear]. Brian Johnson: (CLSA, Analyst) Michelle, just the second leg of this though - Michelle Jablko: Yes. Brian Johnson: (CLSA, Analyst) - I don't understand why you get - initially you get $275 million and then it comes back. Why does the figure reduce over time? Michelle Jablko: In terms of that one-off hit you're talking about? Brian Johnson: (CLSA, Analyst) Yes. Michelle Jablko: So I'll go back over those numbers again. So there's $250 million of impairments and a day one provision for redundancies and branch closures of $245 million. Brian Johnson: (CLSA, Analyst) Yes. Michelle Jablko: Yes. Over time we'll get the market value of the properties as they complete so that's $30 million, so that's really how you get from the $295 million to the $265 million. There are also two other things that happened that offset each other. So we've got the premium of $110 million that we receive over time as the transactions complete, which offsets the separation and transaction costs of $110 million, but also happen as the transactions complete. That s how you get to the $265 million. Brian Johnson: Okay. Michelle, can I just clarify? So these businesses, the earnings won't be adjusted out on a discontinued earnings basis? Michelle Jablko: Not in Brian Johnson: But in 2017? Michelle Jablko: In 2017 we will, yes. Brian Johnson: So the comp that we get reported next Thursday will subsequently probably be altered before we get to the end of the 2017 year? Michelle Jablko: Well, the 2000 DOCUMENT TITLE Page 9 of 14

10 Shayne Elliott: For comparison purposes, right, just say that you're comparing like with like, yeah, we'll be totally transparent about that, just so that you can make your comparison, yeah. Brian Johnson: It's a very stupid accounting stand, but anyway. Okay. Thank you very much. Michelle Jablko: Yep. Shayne Elliott: Thanks. Operator: Thank you. There are no further questions at this time. I'll now hand back to Miss Campbell for any further remarks. Actually Jill Campbell: Thanks Jane. Operator: I'm sorry. I've just had one question pop up. Do you mind? Jill Campbell: No, please. Operator: Thank you. It's from Azib Khan of Morgans. Go ahead please. Azib Khan: (Morgans, Analyst) Hi Shayne. A question for you. So you reiterated your commitment to the Asian institutional business and you've also said that you're looking to keep your presence in 15 markets in Asia. Presumably you'll be retaining your cost base to some extent in each of those markets. How much scope is there for cost-out in that institutional business that you're committed to? Shayne Elliott: That s a really good question. We're actually going to cover that on Thursday in some detail. We are committed to those markets. We will retain there, but - and this transaction - it does help focus what we're doing in some of those countries. But you're quite right. It puts more focus also on the cost base of the institutional bank, and we will be giving some specific update on that on Thursday. And I think we've - it's a good story. Azib Khan: (Morgans, Analyst) Right. Jill Campbell: Jane, I can see that we have three more questions there, and it's fine to let them through, thanks. Operator: Fantastic. The next question is from Richard Wiles of Morgan Stanley. Go ahead please. Richard Wiles: (Morgan Stanley, Analyst) Good morning. Can you just explain to us how you get the 15 to 20 basis points of capital impact? I assume there's some RWA DOCUMENT TITLE Page 10 of 14

11 reductions, there's the write-down, there's the gain on sale and there's also some lower deductions from Q1 for goodwill and software that you're writing off. But can you just run us through the component parts please? Michelle Jablko: Yes, essentially, that s right. You ve got the RWA reduction. Most of the write-down, or the loss on sale, is things that are deducted from capital already, so there's no material impact. Richard Wiles: (Morgan Stanley, Analyst) I see. Okay, thank you. Operator: Thank you. The next question comes from Brian Johnson of CLSA. Brian Johnson: (CLSA, Analyst) I'm sorry, Shayne. I don t know whether you really answered this question a second ago, but does this mean - is the implication that this is the transaction that we're announcing today, but you still haven t finalised the strategy on the rest of Asia? Or can we now assume this is it? Shayne Elliott: Oh no, sorry. So in terms of retail and wealth this is the deal we struck today. We still will run - we still today have operations in the Pacific in retail and wealth, and in four countries: Laos, Cambodia, Philippines and Vietnam. The Laos, Cambodia, Philippines and Vietnam are still under review. We don t - we won't be - there's nothing imminent on that, but they're still under review - Brian Johnson: (CLSA, Analyst) So, Shayne Shayne Elliott: - so I can't [unclear]. But institutional - we have committed to our institutional franchise. We have no plans to change our strategy beyond what we've already said, which is a more focussed business around intermediated trade and capital flow in the region. Yes, it's about improving the operating model and how the returns we generate from that business - but what we do and where we do it, fundamentally, won't change. Brian Johnson: (CLSA, Analyst) And the other leg of this, Shayne? Can you update us on the review you were doing of the wealth business per se? Shayne Elliott: We'll be talking about that on Thursday. Brian Johnson: (CLSA, Analyst) Okay. Thank you. Shayne Elliott: Thank you. Operator: Thank you. The next question comes from Victor German of Macquarie Bank. Go ahead please. DOCUMENT TITLE Page 11 of 14

12 Victor German: (Macquarie Bank, Analyst) Hi mate. Thank you mate. My question's been answered already, but now, since I've got another opportunity, just why is this transaction taking so long to complete? And also with respect to risk, is it right to assume that you continue to bear the risk of all the businesses that you operate in, that - before the actual completion of each individual leg of the transaction? Shayne Elliott: I'll answer the first bit, and Michelle can talk about the technical part in a second. The reason it's taking 18 months is actually it's not really a transaction, it's five transactions. That s just because the nature that it's - we're selling the assets and liabilities in five countries. Therefore, what we're doing is we are transitioning customers and assets and liabilities across to DBS. We think the way to do that carefully and responsibly - in both parties' interests and our - and certainly in our customers' interests and DBS's - we just need to do that thoughtfully. So it's been planned out and - as I - yes, I think Michelle - in all likelihood, the very first country to transition would probably be in the second quarter of calendar '17, early in that part, and then progressively over there. So we're hoping it will be faster, that we - there's a chance it'll be less than the 18 months before the last one's done, but we've put a prudent timetable - but it's just a matter of - it's a sequential - it's more of a sequential process rather than just doing one transaction. Victor German: (Macquarie Bank, Analyst) Sorry Shayne. Is it right to assume that you ve agreed on all the terms of the transaction already? So if, for example, the customer run-off occurs faster than anticipated, there is no change to the price that will be paid? Is it right to assume that? Shayne Elliott: So I'll get Michelle to go through the details and what Michelle Jablko: Why don t I take that one? Shayne Elliott: Yes. Victor German: (Macquarie Bank, Analyst) Okay, sure. Thank you. Michelle Jablko: So that s right. What DBS is taking is the assets and liabilities as at completion, so that s right. There is - so yes, in all [unclear] on that. In terms of your other question about the risk of the business until completion, we continue to operate the businesses until completion, so we continue to have - take - hold the risk, but we also continue to take the revenue. DOCUMENT TITLE Page 12 of 14

13 Victor German: (Macquarie Bank, Analyst) Sorry. To your first point, say, for example, the run-off occurs a lot quicker and, for example, let's say 10% of your book runs off, does that mean that DBS pays a lower price at that point? In other words, is there potential additional impact on NTA or goodwill that might come through if the run-off is different to your expectations? Michelle Jablko: In terms of the premium, the premium is the premium. There is a small amount of it that relates to trail commission in - which depends on AUM, so that might move the $5 million up or down. But other than that, no, the premium's the premium. Victor German: (Macquarie Bank, Analyst) Right. Michelle Jablko: In terms of the RWA, yes, that could come off faster. Victor German: (Macquarie Bank, Analyst) Okay. But then your capital [Over speaking] Michelle Jablko:[Unclear]. Victor German: (Macquarie Bank, Analyst) benefit comes through anyway, yes. Michelle Jablko: Yes, that s right. Victor German: (Macquarie Bank, Analyst) Yeah, okay. Got it. Thank you. Shayne Elliott: And the way it's structured, Victor, is it's in - we have responsibility to run the business well over that time and ensure that we continue to invest in marketing and all those other things. So it's in our interest to do that because we're the owner of the business in the meantime, and it's in DBS's interest as well that we transition to them a good - a well operating business. Victor German: (Macquarie Bank, Analyst) Thank you. Jill Campbell: Okay. Jane, I will need to wrap up the call there because we do - Shayne and Michelle do have some other commitments today. So apologies - I think we did just have one last call waiting. It will - we can see who that is, and we will contact you immediately after we wrap up the call. So with that, I'll just thank everybody who's taken the time to call in this morning. I'm sure we'll be talking to you all again on Thursday, when we announce the FY16 results. Thanks very much. Shayne Elliott: Thank you. DOCUMENT TITLE Page 13 of 14

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