C'mon Aussie C'mon

Get Angry. That's the Way to Change Australia's Banks

Fixing deep-rooted problems will be tough.
Photographer: Peter Parks/Getty Images

Remember that time when revelations of sharp practice at a major bank destroyed its profit and market share and made it never behave badly again? Yeah, me neither.

That's good reason to doubt that the current outpouring of rage at Australia's major financial institutions is likely to result in lasting change.

The anger, to be clear, is justified. The Royal Commission inquiry into the country's financial system has reviewed cases of Commonwealth Bank of Australia charging financial advice fees to a person it knew was dead and Westpac Banking Corp. carrying out alarmingly sloppy loan underwriting.

The nation's largest retirement-funds business AMP Ltd. issued a grovelling mea culpa and announced the early departure of Chief Executive Officer Craig Meller Friday after admitting it charged money for advice it didn't give and then misled regulators about the practice.

As Gadfly has written before, Australia's financial system is riddled with malpractice abetted by inadequate regulation, and boards appear to be going back to their bad old ways.

Still, banks tend to die from defections, not disgrace -- and on that front, there's little sign of change.

Take a look, for instance, at the market share for owner-occupied home loans, which make up about 60 percent of total advances at Australia's big four banks.

There's been a drumbeat of discontent about the major banks at least since the opposition Labor party first called for a Royal Commission two years ago -- but that doesn't seem to have deterred consumers, who've pushed the big four's combined market share down only marginally from 81.9 percent to 80.7 percent over that period.

Four Pillars

The big four banks still dominate the market for owner-occupied home loans in Australia

Source: Australian Prudential Regulation Authority, Gadfly calculations

It's a similar picture with investor loans, where the lenders' slice of the pie has actually risen to 85.3 percent in February from 85 percent in April 2016.

The reasons for this aren't particularly mysterious. Incumbency has its benefits, in terms of branding, branch presence, network effects, and funds to squeeze out the competition -- and Australia's banks have taken full advantage.

What could change this? A long-delayed slate of tougher penalties available to the Australian Securities and Investments Commission announced Friday will help. The Commission's weak enforcement powers have given it scant ability to prevent wrongdoing and made it gun-shy in dealings with financial institutions. A regulator that depends more on cajoling than compelling its subjects is going to end up getting captured by their interests.

Establishing policies in response to ASIC's review of the mortgage broking industry would also help address the big four's market dominance in that area. 1 The Australian Prudential Regulation Authority's crackdown on interest-only and investor home loans is also helping reduce those areas of risky lending practice.

Still, many of the problems with Australia's banking system remain deep-rooted enough that it's hard to imagine them being dug out.

Take the array of rip-off fees outlined by multiple witnesses to the Royal Commission, often described as being driven by managers' wish for their staff to hit sales targets. In a system where the banks are actually pretty competitive in terms of net interest margins and have a limited presence in the institutional business areas where the likes of JPMorgan Chase & Co. and HSBC Holdings Plc make much of their money, that culture is hardly surprising. Squeezing extra fees out of retail customers is one of the few ways to achieve the shareholder returns that form the bedrock of most executive bonus packages. 

Bad Books

Price-book valuations of Australia's big four banks are running close to multi-year lows

Source: Bloomberg

That's a reason to bet Australia's lumbering banking system will fight another day. Price-book ratios of the big four are mostly around multi-year lows, 2  reflecting the slowdown in the country's housing market and weak wage growth, as well as the prospect of more regulation and reputational damage from the current inquiries.

That seems too pessimistic about the prospects for investors, and too optimistic about how future customers will be treated. Changing the shape of Australia's financial system will ultimately require a consumer revolt. So far, there's little sign that's happening.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Australia's big four banks are Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp.

  2. National Australia Bank Ltd., free of the burden of its U.K. Clydesdale and Yorkshire Bank business since 2016, is the one exception.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net

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