Increasing online banking and spill-over effects from the ongoing mild recession in Europe will induce major Australian-owned banks in the Pacific to tighten lending, slash jobs and cut back on slow-performing branches this year.

ANZ took the lead by axing 130 jobs in January from its 49,000-strong workforce with further plans to cut a further 1000 more jobs over the next six months. The bank has operations in 10 Pacific islands states.

Market analysts argue that on average the major four banks would trim 3% of their staff numbers in 2012 from the 180,000 employed in the region.

Despite soaring profits, ANZ has been under scrutiny by its investors with its total cost growth outpacing revenue growth in 2011.

Investors have been worried about the bank’s surging costs. Job cuts have traditionally been seen as a quick fix to streamline a banking entity’s burgeoning cost base.

ANZ’s chief executive Mike Smith has also been under enormous pressure in recent months with its fast-track plans of expansion in Asia amidst recession in Europe.

While the core of the jobs lost would be from ANZ’s head office in Melbourne, where its Pacific operations are based, the cut-backs would be across-the-board, affecting the bank’s retail, business and SME activities, which are spread through Asia, the Pacific islands, Europe and America.

“The Australian retail and business operations are already pretty efficient, so there’s no way you’re going to have massive (job) reductions there,” Bell Potter Securities analyst TS Lim said in January.

Westpac, the second largest foreign bank in the Pacific islands, said last month it would also reduce its 38,000-workforce in the region in 2012, but has no target numbers.

Westpac Sydney-based corporate media spokesman, Paul Marriage said in January: “The bank is initially targeting reductions in the head office, contracting and IT roles, and would increase staff numbers in other areas.”

In total, a broad three percent toning of staff would add $A500 million to the coffers of the big four Australian banks.

Europe-inflicted

slowdown

The consequences of a tough recession in 2011 in Europe—by far the world’s largest trading bloc—is being felt world-wide and even so in the Pacific islands, who benefit through ACP trading incentives given by the EU countries.

Even if bureaucrats or finance ministers in Europe are able to negotiate and possibly save the zone from a looming depression early in 2012, repercussions will still be felt as the banks take precautions in their dealings.

Major Australian banks—Westpac, Australia & New Zealand Banking Group (ANZ), National Australia Bank and the Commonwealth Bank—have been riding high with profits in the last decade, especially in recent years when each one of them have either exceeded or have come close to reaping annual $1 billion profits.

Such impressive dividends have been achieved despite some testing times in the brief recession in 2009, affecting Australia, New Zealand the islands states.

So much so that all four of these banks are now ranked in the top 30 in the world when measured in terms of market capitalisation globally, where Chinese Industrial and Commercial Bank of China and China Construction Bank were the world’s top banks last year.

But 2012 will be different. Chinese leaders and banks have refused to help bail out Europe of their current crisis which means Australian banks with dealings in Europe will exercise caution.

Respected Australian finance analyst David Koch argues that “from now on, bank managers will not be hosing money at new clients like they have been doing over the last 10 years. They are under instructions to go through each client and satisfy the bank’s credit department of the financial soundness of their customers.”

Uncertain 2012 not

seen in a generation

He warned that for the Pacific region 2012 is shaping up to be one of the most uncertain business and economic environments that we’ve seen in a generation, as a result of big losses carried by European entities, who in turn deal with ANZ, Westpac and other Australian icons.

“Access to credit is going to get a lot harder as banks cope with uncertainty and the investment losses coming out of Europe. At a recent Christmas party, the boss of one of our Big 4 banks told their top clients: ‘If you’ve got money to put on deposit, we are going to love you, but if you want a loan, we don’t want to know you.’

“Basically, the banks are going to be short of cash to lend this year. The majors get a lot of their funding from other banks and money markets overseas. But this year, those overseas banks will be sitting on big losses from their European investments and adjusting to tighter banking regulations. That means they won’t have a lot of spare cash to lend overseas, particularly to our banks,” predicted Koch in January.

Through trading agreements that bind the 14 Pacific islands states into selling to Europe, any prolonged downturn in the European zone will have ramifications on the islands, especially since they have been delays in finalising new economic EPA deals, which have stalled since 2008.

As reported in Islands Business last month, only Papua New Guinea has ratified its interim EPA with EU and is now trading with sales of tuna into Europe.   

“No one really knows how bad things will get in Europe over the next 12 months,” says Koch.

Such circumstances would enforce banks to close slow-performing branches if not downsize staff to maintain profits, reported at unprecedented levels in 2011.

Analysts say that 2012 will see a reversal of the trend they have noticed over the last five years because of lower growths, global slowdown as changing banking habits.

Internet age & changing

banking patterns

During the 1990s as the banks began to consolidate their Pacific operations, there were widespread branch closures which triggered a big customer and political backlash.

However, for most of this decade, banks have been adding to branch numbers, particularly in high-growth areas in Australia, New Zealand, as well as the Pacific islands, as part of their efforts to increase customers.

Since 2000, Westpac, ANZ and the Commonwealth Bank have captured and created new markets in their home countries and the Pacific islands states by developing on strengths so as to have lean, productive and efficient operations across the region.

ANZ by far is the largest bank in the Pacific islands as its Melbourne-based Pacific Communications Manager, Erin Kan told Islands Business last month.

Business owners have begun to rely on Australian banks for dealings with the outside world especially the United States, Europe and Asia, where ANZ, Westpac and Commonwealth Bank are strongly regarded.

Islands Business was unable to obtain ANZ’s response to queries on the bank’s future Pacific operations when this edition went to press.

Whilst other foreign banks like Bank of New Zealand, Bank of Baroda and Colonial have either exited the islands or reduced operations over recent years, ANZ and Westpac have acquired and won confidence of businesses with import-export interests in the region. ANZ is now in American Samoa, Cook Islands, Fiji, Guam, Kiribati, Papua New Guinea, Samoa, Solomon Islands, Tonga and Vanuatu. Similarly, Westpac has seven well-established operations in the islands—Cook Islands, Fiji, PNG, Samoa, Solomon Islands, Tonga and Vanuatu.

“Despite the effects of the global financial crisis, Australia’s strong and stable banks have continued to open branches in areas which are experiencing business and population growth,’’ former Australian Bankers Association (ABA) chief executive David Bell said of the last five years.

But as Koch pointed out, the uncertainty of 2012, fuelled by the European crisis and the consecutive interest rate cuts in many countries in 2011, will see banks introduce cautionary measures. Even in 2011, the banks moved on branch closures. The Commonwealth Bank continues to operate the largest branch network among the banks, with 1007 outlets in Australia. However, this is down by two over the past year.

ANZ closed four branches in Australia, taking its network to 816, and National Australia Bank (NAB) fell by seven to 767, with branches across Queensland hardest hit. Westpac was up 10 to 836 but that was primarily due to the acquisition of St George Bank.

Last year, NAB said it was planning to reduce its branch network by about 20 as part of cost-saving measures as well as changing patterns of banking.

The banks are attributing the change to new ways of banking that has encompassed the world of finance slowly over the last 20 years as the days of Monday-to-Friday passbook banking is phased out and replaced by electronic modes.

“The world has entered the 21st century and life, even for the banks, is changing at an express pace,” says the ABA.

“Banks are at the cutting edge of change resulting from the new wave of electronics and telecommunications. Significant customer and community benefits are being delivered through ATMS, telephones, in the supermarkets and online.”

It also warns that banks who do not go with internet age and adapt to the “new and infinitely cheaper delivery systems will be swamped with competition”.

It has been noted in the western world that 90 percent of all transactions are now conducted outside of bank branches.

Even in the Pacific islands states, since the introduction of internet age, small and big businesses alike have quickly embraced the cost-saving services to deal with payroll, make direct payments and to run their accounts.

“This rush online is not only because of the obvious advances in technology but is also due to a growing culture of the use of electronic self-service and increasing new time management skills,” notes the ABA.

Even households are able to complete financial transactions from the convenience of their own homes and not restricted to 10am-3pm schedules.

BSP captures new island markets

Over the last eight years as larger Australian banks like the Commonwealth and Westpac have downsized or even exited the islands markets, BSP (Bank South Pacific) has been stepping in to fill the vacuum where needed like in Fiji, Niue and the Solomon Islands.

While the Papua New Guinea-based bank has yet to match the upmarket IT capacity of the Australian-owned banks in the region, it certainly has come of age in installing modern computer systems in all its four islands operations.

Banks which lag behind in technology will pay a price sooner rather than later as customers are now demanding state-of-the-art services in this fast age communications, warns Australian Bankers Association Chief Executive Officer, Steven Muchenberg in an interview with Islands Business magazine last month.

“The internet has allowed the banks to deliver a wider range of services to a wider group of people at lower cost and has greatly increased convenience for customers who can now check their accounts, pay bills, etc, at their convenience, he said.

Muchenberg said despite the big four Australian banks lowering staff numbers and in some cases closing down branches to maintain high profitability, new players are continuously joining the expanding Australian market, where branch numbers are at a record 5580.

When the region’s single largest bank, the Commonwealth Bank of Australia exited from Fiji in 2009 citing low margins and uncertain economic climate there, it paved the way for BSP to move in.

For Bank South Pacific, one of the region’s few wholly locally owned business entities, the Fiji acquisition was its largest investment outside of Papua New Guinea, its home since 1957.

CBA through the Colonial network, which had earlier absorbed the National Bank of Fiji, was caught in the midst of a saturated Fiji market amongst other giants—ANZ, Westpac and Bank of Baroda.

For BSP, it meant a further consolidation of its presence in Fiji since 2006 when it bought out the Pakistani Habib Bank, in Fiji since 1991.

BSP has had previous dealings with the CBA, which withdrew from PNG in 1974 by transferring its interests to the PNG government under the name of PNG Banking Corporation. As PNGBC ran aground in 2002, BSP was there to bail out and consequently expand its operations in PNG.

Despite its entry into Fiji earlier, BSP only began a serious regional expansion in 2004 when it salvaged Niue by buying out Westpac, the only bank in the tiny island since 1988.

In 2006, it bought out the National Bank of Solomon Islands, where it is the dominant force in finance.

Says BSP in its outlook for the future: “Our focus is about growth—growth built on a culture of excellence—a culture that extends from how we think, to how we behave.”