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Why ANZ's sale of SRCB stake makes sense

Nicholas Grove  |  04 Jan 2017Text size  Decrease  Increase  |  

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Australian and New Zealand Banking Group's (ASX: ANZ) decision to offload its 20 per cent stake in Shanghai Rural Commercial Bank (SRCB) makes sense given the investment no longer fits with the bank's revised Asian strategy, Morningstar says, while describing the stronger capital position provided by the sale as "a good outcome" for ANZ.

On Tuesday, the bank announced it had agreed to sell its 20 per cent stake in SRCB to China COSCO Shipping Corporation Limited and Shanghai Sino-Poland Enterprise Management Development Corporation Limited for $1.8 billion.

The sale price represents a price-to-book ratio of approximately 1.1 times SRCB's net assets as at December 2015, ANZ said, and will increase the bank's common equity Tier 1 (CET1) capital ratio by about 40 basis points to 10 per cent.

This is well above the bank's target of around 9.0 per cent and above the regulatory minimum of 8 per cent, Morningstar head of Australian banking research David Ellis says.

"The divestment is consistent with the bank's strategy of simplifying its business and narrowing the focus of its Asian operations on institutional business," Ellis says in a note.

"The sale follows divestures of five Asian retail and wealth businesses in Singapore, Hong Kong, China, Taiwan, and Indonesia at the end of October 2016.

"We expect ANZ's four remaining retail and wealth businesses in the Philippines, Vietnam, Cambodia, and Laos, which are under review, to eventually be sold.

"Following the sale of the SRCB stake, ANZ will have minority stakes in three Asian financial services groups in Malaysia, Indonesia, and China, with a combined book value around $3 billion as at 30 September.

"We would not be surprised if these investments were also divested."

Ellis believes it is fair to say that ANZ's investment in SRCB has been a successful one, with SRCB contributing $259 million, or around 3.7 per cent, to ANZ's group cash profit in fiscal 2016.

ANZ deputy CEO Graham Hodges says the partnership has been beneficial for both ANZ and for SRCB, with the latter now a "strong, successful bank with a prosperous future".

"As we have previously stated, the sale reflects our strategy to simplify our business and improve capital efficiency," Hodges says.

"The sale will also allow us to focus our resources on our Institutional Banking business in Asia. This includes a significant commitment to China over the past 30 years with 100 per cent ANZ-owned branches in Beijing, Shanghai, Guangzhou, Chongqing, Chengdu, Hangzhou and Qingdao serving our institutional clients."

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Nicholas Grove is a Morningstar journalist.

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