ANZ’s retail and wealth business being sold includes about $11bn of loans and $7bn of risk-weighted assets that are backed by about $17bn of deposits. This business generated about $825mn in revenue and net profit of $50mn, representing about 6% of net profit margin.
While these are sizable numbers, they pale in comparison to bigger players in the region. For instance, DBS (the buyer) made $7bn of revenue and $3bn of net profit in the 12 months until 30 Sept 2016. DBS’s retail business, which pretty much operates in the same regions as ANZ’s Asia business, generated $2.5bn of revenue and $840mn of net profit in the same time period.
First thing to consider, then, is the profitability improvement that DBS could create. All of the banks that are active in Singapore currently generate net profit margins above 40% already. In comparison, ANZ’s 6% net profit margin in its Asia retail business is miniscule, and is likely due to its lack of scale in the region.
Therein lies the opportunity. If DBS were to reduce ANZ’s cost in back office by integrating it into DBS’s existing infrastructure, for example, ANZ Asia business could increase its margins significantly. For instance, even if ANZ Asia business’s margin goes from 6% to 25% (vs DBS retail business’s 34%), its net profit could increase to over $200mn and contribute a 7% growth in DBS’s profits even without any growth in revenue.
|(in USD mn)||ANZ Asia||DBS||DBS Retail||UOB||OCBC||ANZ||HSBC|
What is more interesting is the possible set of changes that could occur after DBS absorbs ANZ’s Asia operation. Since DBS & ANZ’s businesses overlap significantly in terms of geography and scope, this deal represents a consolidation that could change the competitive dynamic meaningfully.
For instance, there were about 11 banks active in DBS’s home market Singapore, of which DBS already controls two (POSB and DBS). ANZ will be another addition to DBS’s brands in Singapore as well as in Hong Kong, Taiwan and China. Reducing the number of competitors by 10% could translate to changes in set of credit cards rewards as well as interest rates on various loans like personal instalment loans.
In order to gain market share, ANZ has been quite aggressive in providing great set of credit card rewards in Singapore. For instance, ANZ’s Travel Signature Card and Optimum World Card were some of the best cashback cards and air miles rewards cards in Singapore. Because banks tend to finance their credit card rewards with the payment fees, providing higher rewards usually meant that banks would be making lower margin on these products.
By taking out an aggressive competitor, DBS could reduce the level competition in various products like credit cards, and increase margin by reducing rewards rates. For instance, according to a third-party data provider of Google search queries, ANZ had about 7% market share in credit card search queries in Singapore, compared to 10% by DBS credit cards and 23% by UOB credit cards.
With POSB, DBS and ANZ under one roof, DBS could potentially be the biggest player in Singapore’s credit card market. With best rewards credit cards in Singapore offering 5% or more of rewards rates, which is one of the highest in the world, Singapore has had one of the highest credit cards rewards rates in the world. This acquisition by DBS could potentially change this picture.
|Monthly Queries||Monthly Query Share|
|ANZ Credit Card||3,600||7%|
|DBS Credit Card||5,400||10%|
|UOB Credit Card||12,100||23%|
|Citibank Credit Card||4,400||8%|
|OCBC Credit Card||9,900||19%|
|American Express Credit Card||320||1%|
|Maybank Credit Card||4,400||8%|
|CIMB Credit Card||2,900||6%|
|HSBC Credit Card||5,400||10%|
|Standard Chartered Credit Card||1,900||4%|
|POSB Credit Card||1,900||4%|
Another interesting category of bank products that may be impacted is personal loans. Personal loans are quite popular in Singapore, and banks have been quite competitive in putting out the lowest interest rates to attract customers. In order to gain market share in Asia, foreign banks have been especially aggressive in providing lowest interest rates.
Best personal loans with the lowest interest rates in Singapore, for instance, tend to come from HSBC and Citibank with costs of 8.5%-10%. This compares to average rate of 15% in Singapore and rates that range from 11% to 29% in the US. In Singapore alone, ANZ had a 4% Google query share for personal loans, and could increase DBS’s business and influence meaningfully from 29% (DBS + POSB) to 33%.
Such a consolidation in the market could lead to less promotions or higher rates for borrowers in Singapore, HK and Taiwan.
|Monthly Queries||Monthly Query Share|
|ANZ Personal Loan||210||4%|
|DBS Personal Loan||720||13%|
|UOB Personal Loan||880||16%|
|Citibank Personal Loan||390||7%|
|OCBC Personal Loan||1,000||18%|
|American Express Personal Loan||–||0%|
|Maybank Personal Loan||390||7%|
|CIMB Personal Loan||210||4%|
|HSBC Personal Loan||480||9%|
|Standard Chartered Personal Loan||320||6%|
|POSB Personal Loan||880||16%|
Although neither ANZ nor DBS has disclosed the pricing of this deal, it seems that DBS investors have a number of positive things to look forward to. Not only could DBS increase profitability of ANZ Asia meaningfully by cutting duplicate costs, the acquisition could meaningfully reduce competition in the region to increase profitability of all banks overall.
While it remains to be seen how exactly competitive landscape will change since there are still quite a number of competitors in these regions, and if consumers will be negatively affected, but what is clear is that consolidation of any industry usually means worse economics for consumers.