Is strict lending killing big ideas? ANZ Group CEO Shayne Elliott

almost two hundred years old. We started here in Australia in eighteen twenty eight, in New Zealand and eighteen forty, Fiji in eighteen eighty, Papua New Guinea in eighteen ten, and then right and now we operate right across Asia Pacific, including all the big money centers you know, Tokyo, New York, Do Bai, London, Hong Kong, et cetera, and right across

the Pacific islands, so twenty nine countries. But you know, our home sort of, I guess it's what it says on the ten right A Z. That's our home, Australia and New Zealand. We've been here a long time. We're big in both places. What's different lots and then not

very much. I mean, at the end of the day, people want the same basic things, right and certainly from an AMZ strategy point of view, people want help saving for finding, buying and owning a house, or starting running and growing a small business, or at the beginning of TOUN if you're a really large company, you want help connecting with the rest of the world and moving goods, whether that's scairy products, iron or whatever it might be,

and money around the world. And those are the three things we do, and that's what we help people on both sides of the Tasman do. So not really a lot of differences. They're obviously regulations different, consumer preferences can be a little bit different, competitions different, but you know, at the fundamental you'd say there's a lot of similarities.

don't think this is rocket science. We said, the world we live in, consumers want more, and consumers want more, and they don't want to pay for it, right, and they're being trained, which is a good thing to want. Twenty four x seven amazing services always getting better, largely for free. You know, So consumers want more, the community wants more. The community expects us to behave differently, you know, it's not good enough community expectation to say, well, though

things are legal, therefore I do it. And so people have higher standards at a community about how we behave. You know, regulators want more, whether it's about more capital, more liquidity, better behavior, all of those things. And then Lastly, competition was going to be more intense. I mean, we live in a world that is protected to some degree.

We have a moat you can use in that sort of language for good reasons, because you know, we as a community who don't want just anybody running a bank, because these banks are looking after our deposits and we don't want it to fail. So there were reasonably high barriers to intrigue yet to be bed, yet to have a lot of capital, you had to be well run.

Some of those barriers have actually come down a little bit for good reasons, to encourage more you mentioned neo banks, but probably more importantly more people doing payments and people like revolution Wiser and or you know, buying our pay later and all these sorts of things. So way more competition. What do we do well, We said, well, we need to be more nimble. We as a big organization have

historically run ourselves on big FIS systems. You know, we invest billions of dollars in big, big computer systems, big branch networks, big things. But they're fixed and they're really really efficient, but really hard to change. And so when competition comes out with something new, or regulated wants something new, both things were really difficult to change and we were slow.

So we said, if we want to stay relevant, we need to be nimble, and so we set about basically changing the way we operate to be more agile and nimble. And that really comes down to two and a half things. One thing is people. We need people who have a growth mindset, people who think differently, people who are excited about change. People are courageous, people who know how to see something out in the market and say, hey, I know what that means. You are our business. So we

call that growth mindset. And then we need our systems and processes that enable us to embed that change quickly, make that change, get that feature to market quickly, you know, make that change from a regulation fast in the residnient, low cost way. And the half bit was we need our people to be able to talk to our systems really well. So that was really when we looked at what we had and where we started, we said, wow,

you wouldn't want to be starting from here. So we've actually actually replatform our bank and we're now on this two platform business where we say we've got these two platforms, one for retail and small businesses and one for institutional big end of customers, and we're building a whole new banking system that is fast, reliable, safe, and really really low cost. But from your from a shareholder's point of view, probably the two really important ones there. Yes, low cost.

It has to be low cost. We're in a commoditized industry and the systems we have that we can talk about it later are dramatically lower cost than where we are today. But I think probably the most valuable point in terms of competitive differentiation is needs to be fast. We need to be able to launch new features and functions quickly to stay ahead and satisfy customer needs.

acc RAN the ruler over the deal. Can we just remind listeners what the advantages this brings and also how you've addressed acc concerns about ACCC concerns about competition and the national home loan markets, smaller medium sized business banking and agricultural banking services in Queensland.

we do today, not quite, but everything is digitized. It's real time. You know, at peak on any day, per second, we have two hundred customers checking their balance every second and making three hundred payments. When you need massive scale and technology and all of that doing done digitally, you need huge scales to be able to operate that kind

of machine and that monster rate. But once you build that machine, if it's two hundred customers looking every secondiar and balance, or it's three hundred, it doesn't really cost anymore, or the marginal cost of that scale is much lower. So once you've got that agility and that scale, you want to be as big as you can because you

can defray the cost over more customers. And it also means that the next time we want to launch a new feature and new functions, something really cool that customers want, it's cheaper if I can spread that cost over seven million customers rather than six million. So what does Sutain Corp gave us? Gathers and more customers. It's a court band for those who know it. It's got about two and a half percent market share in Australia, we're about

thirteen and a half percent share. Because of scale, so we bring one point two million customers onto our systems, it just demands that we will get significant economies of scale by having them on our platform. And from their point of view, we you know, without being arrogant, we have better systems in technology than some called bank because we're bigger and therefore we're able to bring the power of those systems and features and functionality to their one

point two million customers. That's kind of it a triple C. So that's the anti competitive sort of regulator and make sure we're not doing any you know, we're not building monopolies and oligopolies and all that sort of stuff. Look, actually what we see to them as well. First of all, we're actually relatively modest today. We're thirteen and a half percent market share our biggest competitor in Australia. And again remember Sun called Bank's only in Australia and our biggest

competitor here in Australia are CBA. They're twice our size twice, so they're at twenty six percent. Sure, I'm at thirteen and after doing some callp I go from thirteen to fifteen. That is hardly reshaping the competitive landscape of banking in Australia. Oh and Westpac is you know, two thirds bigger than me.

So we were able to show that even with this we get bigger and get the benefits of scale, but it doesn't really change the needle, even in Queensland where Sun Corp is a little bit more, a little bit bigger and share. Even in Queensland, it didn't really shift the needle on competition. And they're able to look at what they look at the public interest and say, hey, is there a broader public interest? So we made the argument that having a bigger competitors, funny enough, is actually

good for competition. You know that we're going to be more competitive with fifteen percent share because we'll be able to do more tech spending and bring more benefits to customers than we are with thirteen. And you know, at the end of the day, while it was a long process, we got that.

market share and protecting margins and profitability. Also recently, an zed to New Zealand CEO and Tonia defended the company's profitability in New Zealand, what do you believe are fair profits for banks to make and how do you strike the right balance between delivering for customers and shareholders and wider stakeholders.

delight and retain customers, and that's what we do. So Sinny doesn't feel like that from the inside, that assertion that people make from the outside, Hey, what's fair. I obviously agree with Antonia's ar tatilation of the issue New Zealand in particular about Australia too. We rely on foreign capital. There are no home loans or small business loans in New Zealand. Without foreign capital investing in New Zealand, we

don't pay our way. That is just the reality. Now, that's okay, because we're still a developing country in many ways, we have a massive appetite for capital to invest and grow and build a better future for ourselves and future generations. It's not necessarily a bad thing, but we need to in order to attract that capital, we need to generate a fair return. What's a fair return? Well, there's sort

of techy answer to that is cost of capital. There's two costs when you're when you're a business, there's the cost of operations, and we're clearly we cover that you mentioned before. We make about twenty one billion in revenue. Is at the group twenty one billion in revenue. We spend about ten and a half eleven running the place, so clearly there's a profit there, and then we some of that's to cover credit costs. So that's the tick we do that. The second one though, is we need

to cover the cost of capital. We've got seventy billion dollars of shareholders capital. That capital comes from all over the world, About almost thirty percent of it comes from outside Australia and New Zealand, and the rest comes here. People give us their capital because they expect a fair return on it, not just the dividends, but they want to see the share price grow as well. And as a rule of thumb, and there's a complex way of figuring this out, cost of capital for somebody like us

said is about ten percent. So basically says, hey, if we want to continue to be able to attract capital, without which we don't survive, we need to be able to generate a return of about ten percent return on that equity to keep that money and shareholders happy and keep the investments coming so that we can continue to lend them home loans and small businesses and do all the things we do. And guess what that's kind of

where we are. In fact, at a group level, our ROI lust the result we just have was only nine point seven, so we're not even quite there, and New Zealand's about the same little bit higher. So that seems about fair and reasonable if we want, if we want a well developed banking system that's safe and continuing to invest in the future. Now, if you don't get that cost to capital, and by the way, it's not a theory.

You can go and have a look in Europe where they don't generate cost to capital, what do you end up? You end up with banks going backwards in terms of actually not being able to support growth and not being able to invest in the future. And that's a really really bad As they say, there's only one thing worse than a profitable bank, and that's an unprofitable bank. Yeah, because then the whole economy ends up. You really end

up in diastrates. And so I think it's about balancing pretty much where it is today.

can always print enough money to pay you back. So it said, okay, if I was going to put my money, I remember capital is a long term so what's the current Say take the five or ten year bond rate in New Zealand and say I can do that all day long. So in order to encourage me to invest in somebody else, whoever that might be, I want more than that. Otherwise it'd be stupid. Why would I accept lower to invest in something that's inherently risky and banks

a risky. Let's not forget banks are leveraged seventeen times now. I mean most of the corporates that your shareholders, that your people who are buying shares might think, you know, companies are leveraged two to one, banks are seventeen to one times leveraged. Right, they're risky, so you go, oh,

I want more than that. So that's your starting point, and then what you do is you basically there's a way of figuring out over long term, what's the premium historically the market has expected for that risk and basically what it's you know, again, roughly the market is expected in order to invest in a bank like anz and not just an zid WESPAC or whoever, about a five percent premium on top of that risk free rate. So

that's kind of the cost of capital. Now, if you're in Europe, interest rates are lower because their bond rates are lower for a whole bunch of different reasons we can talk about if you're interested, but the risk premiums are also about. They're actually not that vastly different, so their cost of capital is a little bit lower than now's. And if you're in Japan then your cost cabalis are much lighter because they're bond rates of close to zero.

So it's really just about the investor's preference on how they evaluate the risk of investing in a band con saying what's a fair return that I would given the risk associated with investing in any company? I want more than risk free rate? And as I say, long, long, long, long term says that number generally is about five ish sixtish percent over the long term.

your best outfit. You go down to the bank, You meet the bank manager, you talk to them about what you wanted to do, and they would probably look you up and down, ask you a few questions, and they judge you on character and all sorts of things, including the numbers, and they'd make an assessment right, and they'd back people with initiative and good ideas and those sorts of things who wanted to have a go today for a whole bunch of good reasons. The systems moved on

and regulation has said, well, we don't like that. We want we want you to be safer in your choices. We want you to have more robust analysis to back up any decision that you make. Spreadsheets, credit ratings, track records, all of those things. That's great, that's fine, and those

are sensible things. Over time, those are becoming more and more and more complicated, trying to protect so well intended, trying to ensure that no nothing ever goes wrong, so nobody ever get We don't like it when people lose their house or when their business fails. So the way to do that is make it as hard as possible

to get the loan in the first place. I'm not saying that that was the design principle, but that's what's happened, and so now we have to go through a lot of process, which is all good, but what it means is the people that would have had a chance in the past and missing out. And so we can see the data. It's not just me theorizing here. If you look at people who have a home loan today, you know, and you look at their level of income, relative to

the average person in Australia and New Zealand. It wouldn't be surprising that over time they've always been a little bit wealthier, they've always had higher incomes in the average. That kind of makes sense. That gap, though, how much higher than the average has exploded over the last ten or fifteen years. Yeah, so now to have a home loan you need not just five ten percent more than the average, you know, and I don't know the numbers

in New Zealand, but they're rough. You know, in Australia it's like forty percent higher than the average used to be ten Now it's forty Why, Well, because we build all these safety factors in now. Some people say, oh, that's because house prices are really high. Yeah, perhaps there's an element of that in there. But the real issue is that banks it's been harder and harder. I'm not the only one saying it. My peers have since it's harder to get a credit card in Australian and he's

on today than it has been in thirty years. In fact, that getting a credit card is harder and Australian is in than almost anywhere else in the world because as a community we've decided we're voting for safety, and so we don't like you know, and that's fine. It just comes at a cost. And the cost is people in the middle. That person that we would have given a home line to a credit card or a small business flane two ten years ago isn't getting it today. And

that's a cost. I think that's a real cost. It's a cost of aspiration and growth and dynamism and the economy, and so I just you know, we raise it because we've been worried does it affect the bank, not really makes us safer. Actually, I'm not proposing a change because of it's an A and z's benefit we're trying to make. We're trying to make a contribution to the social structure and there, and they're cond me to say, is this what we signed up for? You know, is this what

we all agreed as a community. Is that the outcome that we wanted.

not nobody's debating that largely. It didn't really happen too badly in Australians in but it happened really badly in Europe and we know and that was awful, right, And as a reaction to that, government's regulators community said, oh, we don't want that to happen again, right, absolutely, So we put in place all these new rules, all these speed bumps, all these controls, all well meaning, and they

grew up over a whole period of time. And what's happened It's not like somebody's sat around and wanted this, But what's happened is the people who are paying the price of all or that are the people in the middle. The people are used who would have got a home line or a credit card or a small business loan then who can't get one now, who are perfectly decent, hard working, honest, well intended people because we've said, oh, we want to build all these buffers in learning to

value buffers, interest rate buffers. You know, we have all these things we need to do. And again they're well meaning and they protect the bank. So you know, again it protects us. And it should be no surprise that the credit losses in the bank so kind of it all time lows. We've never lost so little, right, So that's a good thing. It means less people are you know,

getting into trouble with their home. But my point is, but lest people are having a home loan in the first place as a result, so the people in the middle, So the average Australian and the average of New Zealander cannot afford the average Australian and the average New Zealand home. Right. So I give you an example. It'd be like if we sat around as a community and said we really don't want anybody to get hurt on the roads. I mean, we would all agree with that, right, So why don't

we all just drive at five kilometers an hour? Well, we definitely stop road accidents, but the entire economy would grind into a halt. And it's kind of what we're doing in banking. We see we don't want anybody to get into trouble with alone. That's fine, but the result of that is we lose dynamism. You know, I go back and I look at a lot of our customers who are now older, who started business as little businesses, startups. They were startups who are big, famous business people in

Australia and New Zealand today. And you go back, asked in how they started. How they started? They literally walked into the bank, put on their best suit, had a big idea when and they got to go because the bank backed them into that aspiration and gave them a start that would not happen today. It can't happen today because we don't allow it to happen today. So I know, if you're a small business you want to line, you

have to show me your track record. You have to prove to me you can repay in all these circumstances going forward.

our minds to open banking and neo banking. We've seen success in the UK and Australia where customers are able to be to more easily switch banks or be offered more competitive services and products from third party financial companies. But how has A and Z approached adopting open banking and tech in Australia and will we be taking the same approach here in New Zealand.

took deposits and made light and you know large. Okay, the act was a bit sexier, and you know there were some nice features around it, but the fundamental proposition was the same. Right. In fact, you could argue it was worse because they didn't have the breadth of service as a big bank hat and really importantly, they didn't

have the stability that a big bank hats. Yeah, in terms of the credit quality and the diversification benefits we had so I and that doesn't mean we should ignore acknowledge. But where the really profound change hasn't been neo banking per se, has been real innovation, which is truly new proposition. So whether it's a revolute or why or the way that or bond ow po latter on those sorts of things, so different ways. I'm engaging with your financials right, those

are ready where the innovation has come. Now, the challenges on a big bank is how do you engineer yourself to have the best of both big, stable, diverse and innovative, fast clever propositions. Well that's our strategy. That's why we launched a m Z plus, our new retail platform, which is. We've got roundups too, but we're the only major bank who can do it because we've built ourselves in a modern,

contemporary stack. Now, everybody criticized us for doing it because a cost a gazillion dollars, cost a lot of money to do, but once you get there, what we're seeing today's the advantage. We're only two years in market. The cost to service a customer on Plus is thirty five percent lower than it is in our traditional bank.

Now we're the only major bank that does that as well, because we've invested in the technology stack that allows it. So banking has always been about people in tech. We don't really have anything else right and the technology actually banks get a hard time and I'll give a bit of a plug for banks, but that it's actually pretty good at rolling out and commercializing technology. You know, think

about these things. We were pretty good at commercializing mobile technology, which is only fifteen years old and now is our number one channel for customers engagement on here, a rich engaging experience on this, you know. So we're pretty good at taking technology. And of course the next big thing in my mind is AI and that you know, that is going to revolutionize the way we service customers and

the propositions we bring to market. But you need the right technology stack to build on to enable it to be something really compelling.

right and really good people. He said to me our ninety fifty six in CR National Cash Register Nember Cash Registers. They took us on a trip to Boise, Idaho, and in nine fifty we saw the future. We saw supermarkets and shopping centers, and we came back and that's what we did. Right. Well, I've seen the future as well. Maybe it was obviously everybody else. You know. I spent a bit of time up in California recently, and the

future is generative AI. And I know probably people are sick of hearing about it, and there's no doubt there's an element of overhype. That's true in any new technology. But I've seen that future. And the future is going to come in two ways. All of us, all of the banks, we'll all everybody will start using these co pilots that are embedded in every single tech tool we have.

Microsoft Outlook. It'll be in Salesforce, it will be in every tech tool we have your phone, and they'll be great and they'll make it all more efficient, just like email made us all more efficient. But the benefits of that won't differentiate you. They'll all get competed away for the benefit of customers, but you still have to do it great. The real opportunity is how do you then take those AI tools and intelligent automation that comes with

it advanced analytics and embed those in propositions. Yeah, so imagine if on your amzid plus you had a virtual personal banker who you can ask questions of. Am I going to be able to form to go on holiday this year? Tell me where my money went last month? Talk to me about am I saving enough to form my retirement? All the beaks will do the productivity stuff,

contact centers all that. Son who have the right tech platforms, we're able to build better propositions and that's obviously where we aspire to be in Australia and in New Zealand.

in Australia, we need to move them across. That's going to take a couple of is what we're start next year. That's really exciting. And then of course what I just talked about, we've got our first AI virtual CFO tool being built in Palo Alto with a partner at the moment hook to be able to roll it out for small businesses in the middle of next year. Because our strategy is, look, we need to give our customers better tools. People want tools to manage their money, make their money

go further, own the home faster, not slower. We want people to own the home faster, and we want people to be able to save for their retirement better. And the way you do that is with better tools. You know, the tools and the insights and the data. And we think the way that will come together in this AI world and that's you know, that's really really exciting.