Australia and New Zealand Banking Group Ltd. (ANZ.AU) Chief Executive Mike Smith Wednesday said he plans to bulk up the bank's domestic operations, though an offer for a regional bank isn't on the immediate radar.

Smith's remarks come a day after ANZ completed a US$550 million deal to buy some of Royal Bank of Scotland's operations in Asia and signal that although regional expansion is the priority, the bank continues to keep a firm eye on domestic opportunities.

On the bank's home market share, Smith said its current slice of 16% is not enough, and he criticized both the government's four pillars banking policy and comments from competition authorities, which he said preempt possible mergers.

The four pillars policy bans any of the country's four major banks from merging with each other.

Asked if the Australian Competition and Consumer Commission policy on banking mergers would prevent ANZ making an offer for regional bank Suncorp-Metway (SUN.AU), Smith said that it would not.

He also said that "there are other opportunities and I would very much like to build the business".

Smith said that Australia's four pillars banking policy has restricted the development of domestic banking infrastructure.

"The actual investment in infrastructure has not been at a global pace."

Speaking to reporters after a business luncheon, Smith said, regional banks play an important role in Australia's banking system and further consolidation would not "necessarily be a great thing".

Asked if ANZ had any interest in making an offer for a regional, Smith said: "you never say never, but right now it's not on the radar."

The CEO of Australia's fourth largest bank by market capitalization said still high funding costs means it's likely banks will lift their mortgage rates ahead of any monetary policy tightening, a move which could have important repercussions for policy makers.

Smith said that the Reserve Bank of Australia should not "muck around" with the official cash rate, as the cost of borrowing will lead to a natural adjustment of mortgage rates and inflation can be contained.

"The banks cost of funding is still high comparative to what it was, and that is going to wash through, so there will be natural adjustment anyway, so let that cycle take effect and don't muck around with the official rate."

He also cautioned the RBA against hiking rates before its clear the economic recovery is sustainable and whilst inflation is still manageable.

"Mortgages are incredibly well priced," he said.

Responding to reporter's questions, Smith said it is possible banks lift their mortgage rates before the Reserve Bank of Australia officially tightens policy.

"If that's out of cycle, it's out of cycle," he said.

Although Australia will likely be the first country to emerge from the global downturn, Smith said the recovery will be long and gradual, rather than "V" shaped, although he added he does not see risk of another systemic crisis emerging.

He said that Europe has yet to see a trough in its downturn, while the U.S. is "talking itself up", with little to show for it.

"Asia, meanwhile, is moving well."

Smith said the next chief executive of ANZ will be likely chosen from within the bank.

"It's incumbent on me to have a choice of successors within the ranks."

He added ANZ expects to make an announcement on a systematic review of its fees in coming weeks.

-By Enda Curran, Dow Jones Newswires;

61-2-8272-4687; enda.curran@dowjones.com
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