The pressure is mounting on Australia's banks as economists and analysts warn shareholder returns will come under growing pressure thanks partly to an increasingly hostile political environment.

After a momentous week tension between the banks and Labor reached boiling point on Friday afternoon with Opposition leader Bill Shorten blasting Commonwealth Bank of Australia chief executive Ian Narev as being insensitive, out of touch, and lacking in corporate empathy.

[It is] inevitable that Australia's banks are going to have to re-direct resources to culture issues. 

Former ANZ chief economist Warren Hogan

Mr Narev told politicians on Thursday to focus less on bank culture and more on driving growth in the economy and defended CBA's right to protect itself from "unreasonable" claims for compensation by customers.

"It's rich for someone who's on $8 million a year to tell victims of his bank that they are undeserving," Mr Shorten said.

Mr Shorten demanded that bank chief executives face up to that reality and ensure similar scandals do not happen again, reiterating the only way to ensure that occurs is with a royal commission.

"It's this attitude of blaming the victims - coupled with scandal after scandal - that have caused Australians to fed up with the profit first people second attitude of big banks," Mr Shorten said. "Rather than spending time talking to Mr Turnbull about how they could avoid a royal commission, top bank leaders would be better off meeting with victims of the industry's malpractice and misconduct."

National Australia Bank chief executive Andrew Thorburn told Fairfax Media on Friday that political debate in Australia "has become way too combative – it's me versus you, us versus them, it is black and white. That's not good."

Mr Thorburn also reiterated his opposition to a royal commission, saying banks had been investigated by various Senate inquiries, and the financial system inquiry, over the past five years which had failed to uncover systemic issues with the banks.

A royal commission "has the risk of being a serious distraction to growing the economy, building better banks and a better Australia, which his what we should all be focused on," said Mr Thorburn, who is also the chairman of the Australian Bankers' Association.

As part of an orchestrated strategy to deflect political and public criticism from the banks following a string of scandals, the banks on Thursday said they will improve treatment of customers, including by setting up an independent review into staff pay which could be a precursor to cutting commissions and bonuses based on the volume of products sold.

Mr Thorburn said the goal of the review is to win "the confidence and trust of our customers, so that as they deal with us they have absolute confidence that advice or a product or a service that we suggest they take is based on what is right for them."

"If one of our people, or one of our agents, are incentivsed to sell a particular product and we believe that is getting in the way of a good customer outcome, then we need to review that and change it... We need the whole industry working together to get to that goal."

Culture could hit returns

Prominent analysts and economists are questioning what impact a shift away from volume-based remuneration towards a more illusive concept of customer satisfaction and culture will have on bank returns, which are already under pressure as funding costs rise and regulators continue with thier push to de-lever the global financial sector with higher levels of capital.

Writing in the AFR Weekend, former ANZ Banking Group chief economist Warren Hogan says bank investors should be anticipating further downward pressure on returns given it is "inevitable that Australia's banks are going to have to re-direct resources to culture issues".

Mr Hogan said that over the past five years, banks have been attempting to achieve a return on equity of more than 15 per cent in an economy where the long term risk free interest rate has been around 3 to 4 per cent. As a result, "senior management have been under tremendous pressure to achieve financial outcomes which could easily mean long-term considerations of ethical and customer issues are overlooked in the name of business outcomes."

Mr Hogan was echoing arguments made by veteran banking analyst Brian Johnson, from CLSA, who has pointed to a "staggering" gap between banks' ROE of 15 per cent and the 2.45 per cent return on 10-year government bonds. He describes the banks' profitability as "egregious".

Mr Johnston said the political environment would make banks "extremely cautious", particularly when it comes to repricing upwards variable home loan rates, reducing thier pricing power which has allowed Australian banks to maintain strong margins and returns.

"Australian bank "pricing power" will be seriously diminished and curtailed in the medium term," he said. "In this environment of increased regulatory and public scrutiny, it is not unreasonable to think the Australian banks might pause for thought before further upwardly repricing up home loan rates to maintain these obvious egregious levels of profitability."

"Any such diminishing pricing power in the home loan market right now is a real problem given that Australian bank funding costs have risen sharply."

Mr Thorburn, who assumed the chair of the ABA last December from Westpac chief Brian Hartzer, said it remained important for banks to pay incentives to staff but would have to be based on a "balanced scorecard" that took account of customer interests. "This includes the service experience and how they view us, they advocacy and their loyalty - not just the revenue and profitability, but there is nothing wrong with that in and of itself," he said.

After Prime Minister Malcolm Turnbull on Thursday took credit for the banks' package this week, saying it stemmed from his speech at Westpac on April 6 when he read banks the riot act, Mr Thorburn said on Friday that speech had "zero impact" and had not changed what the banks already intended to do.

The sustainability of bank returns on equity is set to become a key focus of the big bank interim earnings season during the first week of May, after the Reserve Bank of Australia warned banks last week in its bi-annual financial stability review not to take on excessive risk to meet return targets.

Read more: http://www.smh.com.au/business/banking-and-finance/bank-culture-scrutiny-could-dent-returns-20160422-god5nq.html#ixzz46en5AaWH 

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I don't trust the banks and the fact they do not want a Royal commission to peek into their activities means I trust them even less now. ASIC has shown itself to be a weak regulator, along with all the others like FIRB and AUSTRAC, and I have real concerns that the too big to fail mantra holds sway in these circles. Remember the axiom, that power corrupts and absolute power corrupts absolutely.

 

Commenter

seen it coming

Location

safely out of debt

Date and time

April 23, 2016, 8:15AM

Tens of thousands of innocent financially vulnerable consumers are reliant on, and at the mercy of the greedy profit driven bankers, to be ‘put back in the position they once were’. 
When a Financial Service Provider (FSP) consumer is a victim of malfeasance a consumer victim should be quickly and equitably compensated for any direct or consequential loss or damage caused. 
It has been bought to the Governments & ASICs attention that any of the words QUICK or PAYMENT or COMPENSATION does not even appear in ASIC Act Sec 912a, 912b or in Regularity Guide 165

Bankers and FSP’s have been entrusted with ethicalness of self regulation, self-flagellation and payment quick equitable compensation to financially vulnerable victims of malfeasance, this ‘regulatory folly’ is quite evidently NOT working, furthermore it is obvious the larger the consumers loss the more truculent the FSP
Bankers and FSP denial of liability and delay of compensation certainly does have lifelong devastating impacts on innocent consumers.

Why all these despicable practices and more is condoned or allowed to even take place by ASIC, APRA or Government needs to be seriously questioned and immediately rectified.
Banks & FSP’s must be stripped forthwith of their consumer facing responsibilities regarding victim compensation outcomes and compensation, and a new independent Government body be established forthwith which is fully funded by the FSP’s to ensure the QUICK PAYMENT of COMPENSATION for VICTIMS

 

Commenter

Morpheus

Date and time

April 23, 2016, 10:16AM

Read more: http://www.smh.com.au/business/banking-and-finance/bank-culture-scrutiny-could-dent-returns-20160422-god5nq.html#ixzz46eocdwBB 
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