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Will APRA kill our love-hate relationship with the big banks?

Is the complex love-hate relationship that we have with our big four banks in danger of fading into indifference? David Rowe Is the complex love-hate relationship that we have with our big four banks in danger of fading into indifference? David Rowe

Is the complex love-hate relationship that we have with our big four banks in danger of fading into indifference? Few things galvanise us like the great Aussie sport of "bank bashing".

It's a visceral response to what most people see as a smug oligopoly that uses its market power to routinely gouge customers and crush competition, while providing a level of service that wouldn't have been out of place in the old Soviet Union.

Indeed, the resentment is so widespread that it's been the basis of various bank advertising campaigns – remember the ANZ's hilarious "Barbara the bank manager" or the National Australia Bank's clever "break-up" campaign, in which Melbourne-bank declared that it had "dumped" the other big banks, and encouraged customers to do so too.

On the other hand Australian investors – particularly those running some $700 billion in self-managed superannuation funds – have had a huge predilection for banks, which have a long track record of rewarding shareholders with generous dividend payments.

But the relationship is now fraying. Credit growth is slowing, as the housing market sputters, and regulatory restrictions rein in how much the banks can lend for riskier interest-only loans.

According to the latest reporting season preview from UBS strategists David Cassidy and Dean Dusanic, banks are likely to prove laggards in the earnings race this year.

Earnings growth

The UBS analysts say the Australian market is likely to clock up earnings growth of around 7 per cent in the 2018 financial year, which represents "a respectable, slightly above-trend pace".

But, they warn, the local market's performance is likely to look "somewhat pedestrian" compared to the double-digit earnings growth expected in the rest of the world.

"Part of the reason for Australia's comparative earnings sluggishness is the drag coming through from the banking sector, with only 2.7 per cent earnings growth expected in the 2018 financial year [consensus basis]," they said.

This tepid outlook for bank earnings will make it harder for the big four banks to continue lifting dividends at the rate they have in recent years, which is likely to temper the ardour of some shareholders.

But, on the other hand, community anger at the banks is likely to abate as the big four belatedly – and there's no doubt that some have been quicker than others – come to the realisation that they need to pay a lot more attention both to how they treat their customers and how they manage risk.

The country's big banks will be paying close scrutiny to the progress report released today by the high-powered panel appointed by the Australian Prudential Regulatory Authority (APRA) to take a close look inside Commonwealth Bank of Australia (CBA).

The review, which was announced last August, came after scandals that engulfed the country's largest bank, including allegations of breaching Australia's anti-money-laundering regulations, unfair denial of life insurance claims and financial planning rip-offs.

Bankers will have been struck by the sentence in the progress report that says "the panel is seeking to understand any dynamic between CBA's financial success and any shortcomings in its responsiveness to and management of risk".

Expressed in less polite terms, the APRA panel is taking a very close interest in ascertaining whether the bank's culture is one where its 50,000-plus employees all know that increasing revenues is the only thing that matters, and that any problems are best buried.

Values system filters down

Now anyone who has ever worked in a large commercial bank (as I did in my youth) knows how quickly the value system adopted by senior management and the board (whether it's explicit or unconscious) filters down through the whole organisation.

If a bank hands out lavish bonuses for strong sales performances – and ignores any short-cuts that may have been taken along the way – employees will quickly take note and adapt their behaviour accordingly.

Word about the best way to get ahead will quickly spread through the staff ranks.

Similarly, if a bank underpays staff in its compliance areas, so that more experienced staff either quit, or move to other areas of the bank, talented young employees quickly come to the conclusion that spending time in this area is a career-limiting move.

This is even more so if the bank fails to invest enough in compliance technology. Staff struggling with inadequate computer systems that are time-consuming and cumbersome quickly get the idea that this is a low priority area for bank management.

The APRA panel's review is likely to accelerate the rebalancing that's already under way in Australian banks as senior management and boards put less weight on shooting the lights out with their profit results, and more emphasis on standards of behaviour and the management of risk.

And that's likely to spell the end of our great love-hate relationship with the banks.

This article was first published by  http://www.afr.com
Author: Karen Maley
Last modified onMonday, 05 February 2018 01:55

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