Australia and New Zealand Banking Group Ltd.

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Australia and New Zealand Banking Group Ltd.

55 Collins Street
Melbourne 3000
Victoria, Australia
(03) 658-2955

Public Company
Incorporated: 1835 as Bank of Australasia
Employees: 47,009
Assets: A$84.72 billion (US$66.92 billion) (1989)
Stock Index: Australia London New Zealand

The Australia and New Zealand Banking Group Ltd. was formed when the Australia and New Zealand Bank Ltd. (ANZ) merged with the English, Scottish and Australian Bank Ltd. in 1970. ANZ was the result of a merger in 1951 between the Bank of Australasia and the Union Bank of Australia. Today the Group is made up of more than 50 different businesses interacting to give customers access to a wide range of financial services through more than 2,000 offices in some 40 countries around the globe.

The Bank of Australasia (Asia) is believed to have been the idea of Thomas Potter Macqueen, a wealthy colonist who proposed a joint bank and whaling enterprise to some London investors, who liked his idea well enough to become the bank’s first provisional directors. Macqueen, however, was caught promoting the rival Commercial Banking Company of Sydney behind the directors’ backs, and the Bank of Australasia opened in 1835 without him.

The Union Bank of Australia was founded in a similar fashion. This time a struggling Australian bank, the Tamar Bank in Tasmania, went to London in search of capital and found a group of investors prepared to back a bank in the colony. They founded the Union, which took over the Tamar Bank and opened for business in 1837.

These two groups of investors based their hopes for the Asia and the Union on Australia’s potential to meet the large demand for wool by English textile mills. Although some colonial banks already existed, none of these local institutions could match the financial resources of London-based, private trading banks like the Asia or the Union. Moreover, because these colonial banks were unable to tap the British capital market for another 30 years (except for the Commercial Banking Company of Sydney, which did give the British banks some competition), not one of them survived five years. In contrast, the Asia and the Union were immediately successful—the Asia quadrupled its loans between 1836 and the end of the decade.

In 1838 the New Zealand Company, a colonizing enterprise, approached both the Asia and the Union about opening a branch in the firm’s new settlement. The Asia hesitated because it had reservations about the New Zealand Company. The Union agreed, however, and became the first bank to do business in New Zealand.

Between 1838 and 1841 the Australian sheep-farming boom reached new and feverish heights. During this period both the Asia and the Union consolidated their positions and built up businesses secure enough to withstand the severe depression that began in late 1841. Both banks had the financial strength to take advantage of colonial banks decimated by the depression: in 1840 the Union absorbed the Bathurst Bank, in 1841 the Asia acquired the Bank of Western Australia, and, in 1844, at the height of the depression, the Union merged with Archers Gilles & Company.

With the discovery of copper and lead deposits north of Adelaide in 1844, the colonies began moving out of the depression. The discovery of gold near Bathurst, New South Wales, in 1851 soon produced a general boom. In these new economic circumstances, gold and foreign-exchange dealing became significant banking services, and branch-banking programs flourished with the influx of new mining customers eager for mortgages.

During the “golden decade” of the 1850s, new banks formed to challenge the foreign-exchange primacy of the Asia and the Union, among them the English, Scottish and Australian Bank (ES&A). Although the ES&A’s presence concerned the Asia and the Union, an even greater threat came from the new colonial banks that burgeoned in the country at mid-century. To better compete with English banks, these colonial institutions established London offices of their own, while they also acquired enough colonial investment resources, mainly gold, to provide their own international banking. Thus, from this time on, the Asia and the Union had to share their international role both with new London-controlled banks and with strong colonial competitors.

Between 1860 and 1890 Australia saw prolonged and rapid economic development. But the conservative Asia and Union banks began to prepare for the inevitable downturn in the late 1880s; this letter from the secretary of the Asia, Prideaux Selby, to his superintendent, John Sawers, in July 1888 gives the flavor of the time:

Lower rates .... Let really sound customers feel that they do better by borrowing from us than by looking outside. Keep up rates to those we would rather be without and to those who can only give ordinary security. Sell dead securities while the boom lasts. Shake off speculators and doubtful customers. Do not look for immediate results. Give the seed time to germinate before looking to the harvest, and remember that unless the seed be sown and for the time lost to use, there never can be a harvest at all.

Both the Asia and the Union had steadily built cash reserves up to 20% of all liabilities to the public and remitted heavily to London rather than permit colonial loans to expand. Moreover, both banks had large floating advances to the money market and extensive and varied holdings of gilt-edged stocks from which they could draw in an emergency. Beyond this, they also had many informal connections with other financial institutions. Thus, during the great bank crash of 1893, both the Asia and the Union had a number of sources to turn to for help, including the Bank of England.

In the 35 years after 1853, 28 colonial banks began operations in Australia. Only six of these colonial banks reached the end of the century without temporary or final failure, and of the eight private trading banks that existed in 1850, only the Asia, the Union, and three others survived.

Many of the post-1850 banks failed because they were governed by over-optimism and an avid search for business without enough concern for security. They opened branch banks in small towns without assessing the costs closely, and they attempted to increase their loan portfolios quickly by minimizing risk factors. The Asia and Union never deviated from their conservative policies, but were cautious about opening new offices and circumspect in approving loans.

With the passing of the banking crisis, both the Asia and the Union attempted to increase their lowered earnings. Salaries were reduced and marginal branch banks were closed, except in western Australia, where gold discoveries promised great opportunities. But, more important than branch policy, both banks tried to restrain the unprofitable accumulation of deposits by cutting interest rates, which they believed would decrease the cost of funds and earn the banks more fees through the marketing of cheaper loans to customers. In 1895 both banks agreed to cut interest rates everywhere in the colonies to 3%, even though other banks did not follow.

Despite these measures to preserve profits, the Asia and the Union realized losses in loans to customers who had been devastated in the banking crisis. Although neither bank had missed a dividend payment at any time in its history, stockholders voiced concerns when rates of return fell markedly short of their expectations. Though these dividend results were similar for both banks, the Asia’s board maintained confidence in Superintendent John Sawers and his staff, while the Union’s board resolved that General Manager David Finlayson should retire.

By 1900, the Asia held 12.7% of all deposits and 9.3% of all advances, and the Union held 12.1% of all deposits and 10.6% of all advances in Australia, and both were members of Australian banking’s Big Four banks (the Bank of New South Wales and the Commercial Banking Company of Sydney were the other two). The other seventeen banks in the country were substantially smaller and confined to one or two colonies. Thus, at the beginning of the 19th century the Asia and the Union enjoyed relative strength and prestige throughout the Australian Commonwealth.

In the first decade of the new century, a stable economy prompted both the Asia and the Union to pursue policies of “complacent growth” through branch bank expansion. Between 1900 and the outbreak of World War I, the Asia opened 73 branches and the Union opened 100. Their competitors, still suffering from the banking crash and the depression, had to worry about reconstruction obligations; their relatively small and weak condition dictated a strategy of mergers and absorption rather than branch banking in the battle for market share.

One major issue for both the Asia and the Union in the early 1900s was their relationship with their head offices in London. Better communications and new personalities in London caused a marked shift in formal executive authority from Australia to Britain. London executives began demanding more intimate details and more informed advice than the general commentaries from Melbourne that they had drawn on for broad policy directives during the 19th century. Understandably, Melbourne executives resented their newly subordinate positions. In the end, the transfer of total executive power to the London offices was facilitated by a new policy of elevating older, more conservative executives to the top ranks in Melbourne.

With the inauguration of Australia as a commonwealth in January, 1901, pressure intensified for a government bank. After much debate and discussion, the Commonwealth Bank opened in January, 1913. It offered savings accounts, government banking, public debt management, and rural credit, but it could not issue notes and did not have central bank control. Top executives at both the Asia and the Union were highly critical of and hostile to the Commonwealth Bank. But executives in London took a more balanced view, and both boards refused to contribute to campaigns against the government’s bank, although several colonial banks had done so. Further, they directed their chief executives to accept the situation and cultivate amicable relations with the Commonwealth’s president.

World War I crystallized the banking structures existing in 1914. However, after the war, rivals of the Asia and the Union began to merge to make themselves more competitive. In 1917, the Royal Bank of Queensland and the Bank of New Queensland merged to form the Bank of Queensland; by 1932, when the Bank of New South Wales absorbed the Australian Bank of Commerce, 11 amalgamations had occurred, reducing the number of Australian trading banks from 20 to nine. During this period the ES&A merged with three other banks: the Commercial Bank of Tasmania in 1921, the London Chartered Bank of Australia in 1921, and the Royal Bank of Australia in 1927.

The Asia and the Union continued to expand their branch banking in an attempt to offset their competitors’ growing advantages. Between 1918 and 1929 the Asia opened 49 new branches and the Union opened 41. Although both banks could have benefited from mergers with banks in areas like Tasmania, where they were not strong, both kept to the conservative policies that had been in place since the turn of the century until well into the 1920s.

In London, executives of both the Asia and the Union were aware that their banks had to change strategy if they wanted to rise in rank. Unfortunately, between the Great Depression and World War II, immediate problems took precedence over long-term rebuilding. There was some discussion about a merger between the Asia and the Union during the 1930s, but it wasn’t until 1943 that serious interest in the project revived. At that time, both the Asia and the Union were approached by other Australian banks as possible partners. But each thought of the other as the most natural candidate for a merger.

On its own, each bank was less than half the size of the Bank of New South Wales, the largest bank in the country. They both agreed that a merger would make them more competitive, and also would restore lost stature and prestige. Moreover, if they didn’t act, it seemed likely that they would be left behind as their smaller competitors did merge.

In addition, both were English corporations, with London head offices and a majority of English shareholders, and their scales and styles of business were quite similar. The Union’s strength in pastoral business complemented the commercial and industrial emphasis of the Asia. Only 70 out of 420 branches overlapped. Friendly cooperation within competition had characterized the relationship between the two banks for more than a century.

In 1946 lawyers began work on the details of a merger in which the Asia took over the business of the Union. However, while a government threat to nationalize nongovernment banks delayed any action, it was decided that the original merger proposal was too costly. In addition, a group of key Union executives, feeling that the banks were equals and should join accordingly, began to resist being absorbed by the Asia. The solution was to create a new company, the Australia and New Zealand Bank Ltd. to subsume both the Asia and the Union. ANZ began business on October 1, 1951.

The merger of the Asia and Union catapulted ANZ to the top tier of banks in Australia and New Zealand. Unfortunately, being bigger failed to make ANZ more profitable. A tight government liquidity requirement forced the bank to cut lending in order to build liquid assets to the prescribed level. To offset the lost loan business, ANZ began looking for new programs to raise profits and reduce expenses. A savings bank subsidiary, which could use existing skills and facilities and be funded within the governments’ constraints, was established in 1955. The Australia and New Zealand Savings Bank Ltd. proved very successful.

While ANZ’s administrative hierarchy became more efficient in the early 1960s, General Manager Sir Roger Darval decided that emphasizing the bank’s domestic business would boost profits. He began an accelerated expansion of branch banking. ANZ opened 127 branches in six years; of these 112 were in central business districts, signaling ANZ’s intent to move away from rural business.

ANZ had wooed the English, Scottish, and Australian Bank four times since 1955. ES&A’s conservative controls over lending and liquidity, its highly successful hire-purchase subsidiary, Esanda, and its profit-oriented administration all appealed strongly to the ANZ Board, and ES&A came from the same private trade banking tradition as both the Asia and Union. But most of all, the directors thought that a bigger bank would command more resources than either organization could raise itself. In addition, some feared that foreign banks would move in on ANZ’s corporate and international business, possibly by using ES&A as a host for entry.

And so in 1970 the merger finally took place. The resulting Australia and New Zealand Banking Group became the third-largest bank in the commonwealth, double the size of the fourth-place bank. Unfortunately, despite its expanded presence in the market place, the Group’s profits fell and its expenses rose during its first years, primarily because of a lax administration and unexpectedly high merger costs.

Both ES&A’s and ANZ’s staffs had opposed the merger, each side fearing it would lose out on the distribution of the higher posts in the new bank. Angered by this situation, the board hired an American management consultant firm in 1973 to help its executives redesign the Group’s organizational structure. A modern formalized planning system specifying long- and short-range goals emerged, creating an effective and efficient environment at last. At the same time, the consultants replaced traditional profit goals with goals tied to rates of return on assets. The Group’s executives felt that this change required a large amount of capital immediately. When London objected to the exportation of British capital, the Group’s board realized it would be in the best interests of the bank to change its domicile. After 141 years, the headquarters of the Group were transferred from London to Melbourne on February 2, 1976, and two years later, the Group moved into the newly constructed ANZ Tower, a symbol of the total transformation in structure, philosophy, and character the bank had undergone.

During the early 1980s monetary authorities in Australia and New Zealand gradually began to relax the controls that had limited banking operations since the 1950s. This, together with a strenuous program of cost cutting, led to a substantial increase in profits. But deregulation of the industry also opened Australia and New Zealand to foreign banking. In response to this foreign competition, as well as increased domestic competition, the Group decided to try to buy strength and diversity. In 1979 it merged with the Bank of Adelaide. In 1981, the Group talked to the Commercial Banking Company of Sydney and then the Commercial Bank of Australia about merging, but neither deal worked out. In 1983 and 1984 the Group did succeed in acquiring or buying half equity in the Development Finance Corporation; the Trustees, Executors and Agency Company Ltd.; McCaughan Dyson and Company, a stockbroker; and Grindlays Bank, of England.

The acquisition of Grindlays, with representation in 40 countries, greatly strengthened the Group’s international operations, compelling it to redesign its organizational structure. The bank’s hierarchical arrangement of authority was replaced with a horizontal structure of more than 50 business units worldwide. These independent business units brought an entrepreneurial spirit of creativity and ambition as well as increased profits.

Although the bank’s most recent acquisitions, including the 1989 purchase of New Zealand’s PostBank, which made the ANZ Group the largest banking group in New Zealand, have made it a major international financial player, the Group is still largely a regional organization; in 1989, 77% of its profits came from operations in Australia and New Zealand. However, to remain competitive domestically and internationally, the Group may have to resort to more acquisitions or mergers in order to preserve the profitability of its recent years.

Principal Subsidiaries

Australia and New Zealand Banking Group Limited; ANZ Funds Pty Ltd.; ANZ Holdings (UK) pic; ANZ Life Assurance Company Ltd.; ANZ McCaughan Ltd.; Australia and New Zealand Savings Bank Ltd.; Development Finance Corporation Ltd.; Esanda Finance Corporation Ltd.; McCaughan Dyson Holdings Ltd.; Melbourne Safe Deposit Pty Ltd.