Q&A: Elliott on balancing the intensive care with recovery

“If you're going to go into a crisis, what you desperately need is a banking system that's robust,” he told the AFR-Deloitte Banking and Wealth conference (remotely from Melbourne).

"We also have to be prepared for when the rebound comes and we've got to be on the front foot and be able to fulfil our role, which is to enable the revamp.” – Shayne Elliott

“If we think about the GFC … it was actually a crisis of the financial system and then infecting the real economy. What we're seeing this time, because of the good work done by regulators, by the banks cleaning up their act, simplifying their businesses, strengthening the balance sheets, we go into this crisis in remarkable health.”

Elliott likened the banks to intensive care units where resources needed to be well managed and difficult decisions made.

“What we've got to be careful with here - and again, it's a difficult message to get across - if we're not careful ... we will end up helping all the people who came and asked for help first and then run out of resources to help the people we should be helping.”

Elliott welcomed government stimulus measures and said there was good cooperation between government, regulators and other key stakeholders in managing the crisis.

The full interview transcript is below.

James Thomson: Can I start with a very technical question? How does this crisis feel to you as a career banker?

Shayne Elliott: I think what's different about this one is the speed of the impact. Normally these crises roll through the economy at a pace but this has just kind of hit a wall - really, really fast. We've seen a number of our customers go from one hundred to zero overnight. So I think the speed is what is massively different. Therefore, what we've got to be doing as an industry, as a bank, but also in cooperation with other parts of the community, is we can't just fight the last war. We can't just say “oh, this is GFC Two”. Let's just bring out the tool kit, all the things that worked there. We have to iterate and innovate as we deal with this crisis in its own right.

JT: I guess one of the advantages - if you can call it that - for ANZ, is you're in 33 markets across Asia. So that's giving you an example to see how this virus is spreading throughout East Asia and I guess get ahead of it. Given that, how do you feel the ANZ machine is coping with this crisis? Are you able to deal with the deluge of customer inquiries? Are you feeling you're on top of that part of the problem at the moment?

SE: We're dealing with the same issues as all of our peers. To your point, though, we have an advantage because we operate in 33 markets around the world. Some of our countries, most notably China, Taiwan, Singapore, South Korea, came early into this. And so we've been able to learn from them what works, what doesn't work, what mistakes not to make. And so whether that's about working from home, splitting teams, A-B chains or ramping up call centres, whatever, we've been able to take on those learnings very, very quickly.

The other thing, of course, because we have big operating hubs, particularly in India and the Philippines. Those places, sadly, have been prone to flooding and other sorts of natural disasters. So we're pretty adept at rolling with change. So we were able to move 7000 people in our Bangalore hub, who process a lot of our transactions, over one weekend, from fully being in the office to fully working from home with barely a hiccup. And so that agility has really served us well.

That is not to say we don't had strains, of course we do. We've been deluged with people calling, wanting to get a payment deferral or just ask lots of questions. But I think we're actually in incredibly good shape. And, partly as a result, because of our international network experience you mentioned.

JT: You're saying customers go from 100 to zero very quickly. What stage are we at in terms of getting some of the stimulus measures that the RBA and the government have put through the system? Things like the shape of funding for loans? What stage are we at in terms of getting that sort of assistance out to businesses? Are we still at this sort of shell shock stage where businesses are hunkering down and trying to figure out what's what, what the damage is? Or are we starting to move into that time when they are accessing credit and starting to figure out their financial positioning to get through this?

SE: From our view, we're still at the very early stage. A lot of our customers are literally just shell shocked and they're working through their own crisis in terms of what needs to be done.

I can give you the data: we've got about 130,000 small businesses that we deal with. We've had a little bit less than 10 per cent of them reach out asking for assistance in terms of payment holidays. In terms of our home loan customers, that's a very, very small percentage. So I think it is going to take time for people to digest this. And also for people to focus on what options are available to them and what needs to be done. So were at the very, very early status.

I’ll just say, James, I think stimulus is probably the wrong word. You can't stimulate a business that's closed and many of our customers are literally closed. If you use the virus as an analogy, this economic impact is affecting small businesses in particular but also large. And the right response here is isolation. And what we need to do is isolate those and stop the spread so a problem in retailing isn't going to infect landlords and in affect keep going. And so the way to isolate is exactly what the government has been doing and what the banks have been doing - to say, let's grant these payment holidays, let's take pressure off people so they're not just passing the parcel right around the supply chain and infecting more and more of the economy.

JT: You mentioned there the question of infecting businesses, infecting landlords and that sort of thing. We're anticipating some more measures from the government side in terms of wage subsidies and rent relief. What do you or what's your view on those measures?

SE: If you're a business, you essentially have four big line items of cost. For many of our business their revenue has disappeared. So they’ve got four things to manage. One is the wages. And so sadly, at the coalface, having to let people go. So a wage subsidy will take pressure off that. Obviously you’ve got to see the detail that helps.

Second is rent. And again, there's been it seems to be a general civil-society agreement, at least with even without government interference yet. But they'll come to say: “Hey, look, landlords are going have to forgive rent and banks are going have to forgive the landlords for that and give them some time.” I think we've got to a good space on that.

The third item is just the cost of banking if they do have debt and obviously, we've provided banking debt holidays to take that pressure off.

And the last one is tax and governments work on that. So I think collectively removing the pressure from businesses and we'll see the details. But actually the government's focus is on the right areas.

JT: What we've seen, looking at the banks’ results, a few things will stand us in good stead. A lot of mortgage customers are ahead on their loans, quite substantially. I guess the banks have been looking for business credit card that hasn't been appearing. But the flip side of that is that there's not too much leverage in that business section of business sector. And I guess the banks, of course, themselves have built up substantial capital buffers which are proving to be very valuable. What's your sense in the stability of the economy? Are we going into this with households and businesses and the banks in relatively good shape?

SE: Yes. I mean, if you're going to go into a crisis, what you desperately need is a banking system that's robust. And, you know, if we think about the GFC - not so much in Australia, but globally – it was actually a crisis of the financial system and then infecting the real economy. What we're seeing this time, because of the good work done by regulators, by the banks and cleaning up their act, simplifying their businesses, strengthening the balance sheets, we go into this crisis in remarkable health. I mean, the Australian banks had never had as much capital as we have today in either absolute or relative terms. We've never had more liquidity.

Remember, it's liquidity that is ultimately the issue for banks. Capital is good but liquidity is king here. We've got incredible levels of liquidity and lots of support from the Reserve Bank. And of course, to your point, corporates, our customers generally go into this in incredibly good health. Credit losses in the banking system in Australia from all sources, mums and dads all the way through to big institutions, had never been lower until this point.

So we do not have an inventory of the bad bank stuff that we are dealing with. So we have the capacity to really absorb a lot of shock from the system. So that's good. Now, in terms of your question. Household debt is high. We know that. But to your point, many, many Australians, it is a significant proportion, are ahead on their repayments. While we should focus on the tragedy of a million Australians losing their jobs and the situation there, most Australians have not lost their job. And in fact, many people still had secure employment and will continue to be able to meet their financial obligations. So the banks are in great shape. And that's why as an industry and as ANZ we've been able to lean forward and provide assistance through this.

What we have been careful of is - and this is hard - we don’t want to spend all our resources surviving this. We also have to be prepared for when the rebound comes and we've got to be on the front foot and be able to fulfil our role, which is to enable the revamp, because customers are going to want to be able to access finance, to restock, to rebuild, etc. So we've got to get that balance right.

JT: That's a great point. Do you have a working thesis on how long this might last? A year? And here your economic team are seeing lots of data, your payment systems etc. Are you starting to develop scenarios around what we might see? How long does this go for?

SE: Yes, we are. But you know, what we know in these crises is you just don’t know. And so I think trying to waste too much time, trying to be precise on the base case is largely pointless. The right thing to do here is to be incredibly agile, flexible and conserve some level of resource for the unknown. But obviously, you have a base case. Our base case is for a general, we don’t say, but the sort of general shutdown of the economy or quietness, whatever form that might take, is something between three and six months.

And the reason we at the longer end of that than some people and potentially longer is that our economy is an open economy. It does rely on tourism and foreign students. It's really hard to imagine that those things go back to normal within three to six months. It's not just about what Australia does to try and contain the virus, it is actually that what the world does. We're probably on the more bearish side of forecasts of back to normal - whatever that might mean.

JT: So what's your view on whether we should go for the sort of full lockdown now, really get on top of this all or whether we take a more nuanced approach perhaps and try and stage it as the government's been doing - stage the shutdown and then stage the reopening. Do you have a sense of what your path would be?

SE: In our view, this sort of staged approach has some merit to it. And what I would just observe is that the private sector, like it does in many things, is actually leading the way. And, essentially, while I'm sitting here at ANZ doing this, I'm about the only person here in the building. I mean, the reality is we are on lockdown. We have seen 87 per cent of the people who come to work in an office at ANZ, not including branches, are working from home. 100 per cent of our people are working from home in India, the Philippines and New Zealand, except for those few essential that we have in the branches.

I imagine we’ll quickly go to reduced hours as Australians learn that while it's nice to know that the bank branch is open, no, I don't actually need to go there. So I think the private sector certainly is leading the way in terms of an effective shut down. But the good news is we're not shutting down activity. We're just adapting to the new world and the approach we've taken at ANZ, this is not going to be for a week or so, a month, this may be for many, many months. And so we had to adapt pretty fast.

We've got the infrastructure to do that. We've got great technology like this that enables us to be able to still fulfil our role in the community. And we've got some great people who really want to stand up and do the right thing.

JT: Your CFO’s not asking whether you need a physical office at all anymore is he? Given the success with working from home?

SE: Actually, it’s she. In all seriousness, it's going to raise a very interesting question. So what we know from history is that the economy post-crisis always looks very different to the economy pre-crisis. It will change and people will change their behaviour.

Consumers will change. People will learn - actually, I quite like this digital part of my life. For example, in our industry, I imagine more and more people will say I quite like doing the banking on my phone. And I'm not going to go to the branch so much as I used to. Even though it was a habit, consumers will change their behaviour, corporate's will change their behaviour. Every single boardroom, in a board meeting, now a virtual meeting, will be asking the questions about outsourcing make sure that we insulate ourselves from the risks we've seen come through to us. So I'll be questioning things about supply chains, where they had been manufacturing plant, their diversification strategies. Their staffing strategies. What of their infrastructure technologies, all of those things will change.

As a result of that, there'll be some winners and some people do incredibly well and have new models and new business lines and things. And there'll be some that don’t. And, unfortunately for banks, one of the responsibilities we have is that we are sort of the ICU unit of the economy. These corporates and households will come through into intensive care and we will have this unfortunate role at some point of having to decide who comes out at the end in better shape or not.

And you've heard some of the banks, and I've said, this line about we can't save everybody. And it sounds dreadful. But the reality is, even though we are incredibly resourceful and we have large balance sheets and capability, we can't do everything. And so we're going to have to apply our resources, our balance sheet, our help to those that really do have sustainable business models. And we'll come through this in better shape. And the point is, if we don't do that, if we are actually failing the community. And so it's a big obligation. It's a big responsibility but it's something we will have to be much more mindful of as the as the months pass.

JT: But that's just the sustainability of businesses that could emerge from this crisis. Of course, one lens that you look to make that assessment. What of the sort of strategic importance of businesses, that may be a consideration as well? I'm thinking here of large employers, all strategically important employees in the economy. Will you look to prioritise those customers?

SE: We are going through a complete rethink, not in terms of customers per se at this point, but you sit there you have to reassess the new world. So you just step back a little bit. First focus is on protecting our people and protecting the bank, our ability to operate. Make sure we continue to do what we've done. Second thing, we have to focus on adapting to this new world. And you know what all that that means accepting it is going to be for some period of time. Then we focus on engaging with our stakeholders, with regulators, government customers, the public, to give them some level of comfort, some level of reassurance about what we can and can't do.

But the last piece is preparing for the future. How do you do that? Well you have to take in all the new information. The world has changed. It will never be exactly the same as it was before. And so we need to reassess what does that mean? And as I said, some parts of the economy will do better, some worse. We have to reassess that. We need to rethink through what the needs of those customers are going to be in the future. And then we need to reprioritise our own work.

So there'll be some things that we were doing that we should go faster on. Prepare for the new world. There'll be some things we should stay the course. There'll be some things we should keep doing but slow down. And frankly, there'll be some things that are just no longer relevant. Just stop. So there's a complete reassessment happening. And to your point about strategic - I don’t have perfect foresight, I don’t know what those industries will be, but the only way to survive and to help assist in the recovery is to be incredibly flexible. But also I keep making this point about having the resources available to help.

What we don't want to do is be in this debt laden, depleted economy at the end. A zombie economy where we can't get back on our feet because the banks are too busy dealing with bad debts from the past. It is not our base case, clearly. And I think, you know, there's nothing to suggest we're going to end up there, but we shouldn't lose sight of that.

JT: How are banks going to be able to consider, if you've got this new funding facility from the RBA, to lend to businesses? As you said, you're dealing with businesses where the revenue has gone to zero. The usual sort of cash flow forecasts and previous profit statements don't really work to guide your lending principles anymore. How do you approach that? What do you tell your business bankers?

SE: Clearly, it's not easy. But what we do is we sit here and say, look, the difference between this crisis and many others, we sort of do have an end in sight. We can argue about timing, but we sort of know, we’re highly confident they will be a vaccine, we will get the economy back open again at some point. So this is about surviving and making sure that we get people through this period so they can get back on their feet. That's a little bit easier than perhaps says the GFC or some of the Asian financial crises. So that helps in our ability to assess.

So we basically go back to basics. We look at our customers and say given that, do we think they have a business that will go back to normal? Will people go back to the movies? Will people go back to restaurants? Yes, we believe people will travel again and all those other things? So yes. Does this company, do they have a track record of integrity? Are these people who do what they say they will do? Do they get it? Are they willing to do the right thing? That's very, very important. And then do they have the financial wherewithal to get there, to survive? Are they not overladen with debt, et cetera, et cetera, and they have the operational capacity. So there’s a sort of structured way of walking through those things.

I imagine that the vast bulk of our customers, the vast bulk, meet that criteria. But that's exactly what we're going through with our bankers at a moment. What we've got to be careful with here - and again, it's a difficult message to get across - if we're not careful, and I’m talking about the other banks too, we will end up helping all the people who came and asked for help first and then run out of resources to help the people we should be helping. So I think people have to bear with us a little bit. We want to do the right thing. We want to help as many as we can. But we also need to be really cautious about our own resource allocation.

JT: Will you need some relief, I guess, is the word right word from ASIC around responsible lending laws? They do dictate what you can do from personal loans, rather business loans. Do you need a bit of guidance?

SE: I think ASIC's actually been incredibly accommodating already on that. They made some statements around that. The trap here is we want to be responsible, too. So nobody sitting here saying we want to do irresponsible lending. The question here is just saying, look, given the speed of change, given the speed of response that's required, there is a risk we trip over ourselves and make some unintended mistakes along the way.

And what we're asking for the regulators is, can we just have a little bit of tolerance that we won't get it all right? If we if we try too hard to be perfect, we'll be too slow. And everything I hear from the regulators is incredibly accommodating and understanding. I don't think that that's an issue, personally. It's not something that we worry about at ANZ in terms of our response. We just sort of getting on with doing what we think is the right thing. And I think the community, at the end of the day, will judge us on getting that balance right. We're prepared to stand on our actions on that one.

Andrew Cornell is Managing Editor at bluenotes

This is an edited version of a discussion between Shayne Elliott and Australian Financial Review journalist James Thomson at the AFR-Deloitte Banking and Wealth Summit – Financing Australia through the Crisis.