The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Monday, March 8, 2010

The Victoria Bitter of banking

Is there a bank out there that can step up to the plate and go a few rounds with the four major sumos? With the partial or whole acquisition of Aussie (CBA), RAMS (Westpac), Wizard (CBA via Aussie), Challenger (NAB), St. George (Westpac), and BankWest (CBA) by Australia’s majors, there appears to be a missing market today in the ‘contender’ space. We have the four fat oligarchs and then daylight. Naturally this affords interesting commercial opportunities that will play out in the years to come.

Arguably one of the most successful things Aussie, RAMS and Wizard did was establish very visible, national brands. They built these brands on the back of what were viscerally Australian and anti-authoritarian images: picture the (notionally) ocker John Symonds telling us how Aussie would save us from the spectre of the brutish barbarians. Consider the wonderfully raw and parochial name—nothing more was required than ‘Aussie’. And then we had Aussie’s slightly more refined contemporary, Wizard, led by the rugby league loving, Bondi Adonis, Mark Bouris, who would assure us with that beguiling and brawny smile that Wizard too could beat the banks.

Genuine non-bank alternatives to the majors have now largely vanished. Symonds has been wiped from Aussie’s marketing campaigns, and is conspicuously diplomatic when asked about the majors. Of course, CBA now owns one-third of Aussie and supplies all of its funding.

Australians have been left with their seemingly much quieter regional cousins—Bendigo & Adelaide, Bank of Queensland, and Suncorp—and one little known curiosity, ‘Members Equity’. None of these institutions have successfully tapped into the rich ‘challenger’ vein. They just do not penetrate the consciousness of, say, Sydney families in the same way that Aussie, RAMS and Wizard once did. Indeed, it is almost as if some of the regionals are hamstrung by their intrinsically localised brands.

The exception is Australia’s dominant regional player, Bendigo & Adelaide Bank (B&A). B&A possesses a formidable national footprint comprising more than 440 branches located in every State and concentrates on the non-capital city markets that are poorly serviced by the oligarchs. B&A has also pioneered the innovative ‘community bank’ model, which accounts for more than 250 of its outlets (the local community owns the branch that is serviced by B&A). It is adroitly managed by its Chairman and CEO, Robert Johanson and Mike Hirst, who are independent, over-the-horizon thinkers likely contented with their ‘narrow-banking’ approach (ie, keep it very simple and sweet, and only innovate if you are truly improving the customer experience).

B&A’s model appears well positioned to capitalise on a post-GFC world in which transparency and parsimony are prized above most other things. In many ways, B&A is a major bank in non-metropolitan Australia. And they would presumably agree with the arguments I tendered last week (click here) that simple savings and loan structures are less exposed to extreme tail risks than the more diversified yet complex operations of a major bank, which span retail and business banking, funds management, stockbroking, investment banking, and international banking (witness ANZ recently secure a banking licence in India).

After B&A we are left with the two other regional banks, Bank of Queensland (BoQ) and Suncorp, and arguably the most intriguing ‘contender’ candidate, Members Equity (now known as ‘ME Bank’). One of the chief challengers these smaller institutions face is the absence of a national footprint with which to scale their growth. BoQ only has 260 branches, over half of which are located in Queensland, with the remainder scattered between NSW, Victoria, and WA. Suncorp has just 177 retail outlets, most of which are in Queensland. And the more recently established ME Bank (circa 1999), which is owned by the notoriously cost-focussed industry super funds, has fewer than 10 branches smattered about the East Coast.

As I suggested here, one idea for these smaller lenders is to harness Aussie Post’s circa 4,000 national outlets as a low-cost deposit-taking and loan origination network. Fusing a deal with Aussie Post together with first-class online capabilities and a creative marketing push could catapult BoQ, ME Bank, and/or Suncorp’s growth prospects.

If you think this is a stretch, just look at the extraordinary inroads ING Bank (aka ‘ING Direct’) made into Australia’s deposit-taking and loan markets following its entry in the late 1990s. From a standing start with effectively no local presence or branch network, ING built a massive deposit-taking franchise (remember all those catching ING Direct ads?) and transformed itself into the sixth largest home loan lender outside of St. George with up to $1.5 billion a month in new approvals. It is one of the lesser known success stories in recent corporate history.

Amongst these three alternatives, ME Bank offers perhaps the most potential for a number of reasons. First, its tiny branch network means that it has very low fixed costs, and the flexibility to pursue a range of creative distribution options in a similar vein to ING. Second, its industry fund ownership has imbued it with a genetically-ingrained focus on customer service and cost control. Third, it has the benefit of a non-regionally identified brand. Its original name, Members Equity, is a literal reflection of its history: the equity of members in super funds was used to create a low-cost bank. Fourth, ME Bank’s shareholders could give it access to a unique funding advantage. We have argued for years now that super funds are inordinately underweight fixed income assets and equally overexposed to equities. The wholly-owned ME gives them the perfect conduit through which they can access highly-rated corporate and household debt securities. And finally, ME has a charismatic new CEO, Jamie McPhee, who previously carved out a very successful career at Adelaide Bank.

I’ve known Jamie for several years, and he is unlike any bank CEO I have seen. He captained the Australian U19 cricket team, and is as brawny, ocker and athletic as they come. Jamie is in the Mark Bouris mould, and would make for a terrific talking-head should ME ever choose to use him this way. I can imagine him standing in his gear at the edge of a cricket field, sweat rolling off his forehead, casually convincing viewers that he's different to all the other major bank executives, just like ME's low-cost products and first-rate customer service. Think of one of those iconoclastic Victoria Bitter ads featuring swarthy workers, but transposed on to banking! Just an idea...