Banking and Financial Institutions

Guy HargreavesACF-104

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Recap of yesterdayOverview of structure of different types of

commercial banking enterprisesUnderstand the different departments and

roles of those departments within a typical commercial bank

Overview of units within a typical investment banking business

Theory versus practice: how does a real commercial bank operate in 2015?

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Today’s goalsUnderstand various components of an

Australian commercial banking businessReview of important functions of a

commercial bank including liquidity, capital, margins, revenues, strategy by studying ANZ

Form a sound understanding between the theory of banking and practice by studying ANZ bank case

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Top 20 global bank by market capitalisation

One of four major banks in Australia

Good commercial bank to study

ANZ Banking Group

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Some ANZ shortcuts:Australia – means retail + small commercial

in AustraliaNew Zealand - means retail + small

commercial in New ZealandAPEA – Asia Pacific Europe Americas (ie all

the rest!)IIB – Institutional Investment Bank ie all

Commercial Wholesale Banking activities including Financial Markets, Corporate Banking etc

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Sustainability important to ANZ

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Elements of good banking

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Global bank, regional strategy

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Diversified income streams

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Diversified balance sheet

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Important numbers for ANZProvisions: write down

of loan value which flows through P&L

PBP: profit before provisions

ROE: return on equityCET1: Common Equity

Tier 1 - % equity versus total assets ie regulatory capital

APRA: ANZ’s banking regulator

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FX matters to resultsRevenue generated in

multiple currencies ie AUD, NZD, USD, GBP etc

When revenue generated in non-AUD then AUD FX rate important

If AUD FX rates held constant over the six months Revenue growth would have been 5.3%

NPAT: Net Profit after TaxROE: Return on Equity

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Net Interest MarginNIM closely

watchedDifference

between deposit rates and lending rates mainly

NIM defined for: Business Assets Retail Assets Deposits

NIM falling = more competition in market usually

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Cost / Income closely watched

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Return on RWARWA: Risk Weighted AssetsRegulatory Capital =

RWA * BIS III % ratios

BIS III % ratios set by Basel committees and managed by Bank Regulators

Return on RWA = NPAT/RWA

Gives properly adjusted sense of banks net earning margins adjusted for risk

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Risk: CreditProvisions are losses

expected to be made on defaulted or near defaulted loans

Impaired Assets are financial assets that are under significant risk of having provisions made against them

ANZ’s impairment trend is positive ie problem customers are being worked out of the bank

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X-Sell is vital in commercial bankingCustomer acquisition costs

are mostly fixed (not variable)

Once a Customer has passed KYC (Know your Customer) rules then an account can be established

Once an account is established ANZ wants to not just sell one product to the customer, but two or three or five!

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Digital investment criticalFrom zero in 2012 ANZ has

grown mobile banking revenue massively

Fending off the challenge from Silicon Valley which is using technology aggressively to poach bank customers

Commercial banks MUST invest in FINTECH or risk being left behind like the old taxi industry (UBER)

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Many factors impact Wholesale BankingANZ Wholesale Bank was impacted by:

Margins, counterparty credit risk charges (FVA), commodity prices, regulatory costs, trade finance volumes, FX rates etc etc