ANZ buys ING's stake in insurance and wealth management JV

On Friday, Australia and New Zealand Banking Group (ANZ) acquired ING's 51% interest in its life insurance and wealth management joint venture in Australia and New Zealand for A$1.76 billion ($1.53 billion), making it the sole owner of these businesses. Until now, the businesses have been run as a 49:51 joint venture between the Australian and Dutch firms.

The price translates into 11x normalised calendar 2008 earnings for the businesses and 1.2x the embedded value on December 31, 2008. The deal is expected to be cash earnings per share accretive in financial year 2010, without taking into account significant synergies, ANZ said in a written statement.

The investor call that ANZ held on Friday morning was in itself indicative of how ANZ's business is expanding. ANZ chief executive officer Mike Smith dialled in from Hong Kong, while acting CEO for Australia, Graham Hodges, and CEO for ING Australia, Harry Stout, both dialled in from Sydney, and Peter Marriott, ANZ's chief financial officer, joined the call from the bank's headquarters in Melbourne.

"We had said earlier that we are making meaningful progress in building a super-regional bank and that we are bullish on Australia and on wealth management," said Smith in his opening remarks. "This deal brings certainty to our wealth management business through full ownership of an established business and in the medium term [offers] the flexibility to pursue opportunities without the constraints we've had operating as a JV." Smith took over as CEO of ANZ in mid-2007 and has repeatedly articulated a strategy to grow ANZ into a more regional firm.

Smith's confidence in the deal was evident as he referred to it being struck at just the right time of the cycle.

Analysts questioned what direction the future growth of the business would take. Both organic and inorganic, said Smith, and noted that the firm could look at other acquisitions. This deal "provides us with a few more arrows and we now have a full quiver", Smith said metaphorically.

Analysts also highlighted that the return-on-equity in ANZ's wealth management business was below the cost of equity in 2008. Smith replied that 100% ownership gave ANZ more control over product manufacturing where margins are earned and that streamlining between manufacturing and distribution also presented opportunities to capture higher margins.

Smith was forthright that this opportunity presented itself because of the financial crisis, since ING was earlier not willing to sell its 51% ownership. The businesses ANZ is acquiring were founded in 1878 as Mercantile Mutual and were rebranded as ING Australia in 2001. The following year ING and ANZ merged their insurance and wealth management operations in Australia and New Zealand in a deal which saw ANZ own 49% of the JV. ANZ's seven-year history with the business provides it with knowledge of what it is buying and of the people, hence minimises transaction risks, said Smith.

ING continues to operate ING Direct, ING Investment Management, ING wholesale banking and ING real estate in Australia. ING IM will continue to be the preferred provider of asset management services to ANZ after the deal. ANZ will acquire ING IM in New Zealand.

"We have no interest in the businesses which remain with ING," Smith said categorically.

Smith stressed that ANZ is not raising capital and will fund the deal through capital on its balance sheet. This summer ANZ shored up its balance sheet with a A$2.5 billion share placement, which it said was intended to provide capital for organic and inorganic growth opportunities, including the Royal Bank of Scotland assets it was then looking at. ANZ paid $550 million for select RBS assets in August.

Fitch Ratings on Friday affirmed ANZ's long-term rating at AA- with a stable outlook, commenting that the acquisition added "further diversity to the group by increasing market share in the Australian and New Zealand wealth management sectors". ANZ's tier-1 capital ratio will drop by 70bp but remain strong at 9.5% after taking into account the outlay for the acquisition, said Fitch.

"We don't know if our current capital base is enough to meet our aspirations in Asia," said Smith, "but we do know that we will continue to look at opportunities." And as ANZ's share price gained more than 1% to close at A$23.79 on the Australian Securities Exchange on Friday, it would seem shareholders continue to be supportive of its plans.