How Much will Misbehaviour Cost Banks in Australia?
The $2.4bn (FJ$3.65bn) in compliance costs, fines and customer remediation represents only about 2.5 per cent of the expected more than AU$90bn (FJ$136.71bn) in cash profits the banks are expected to churn out in the next three years.
Australia’s big four banks are facing an additional AU$2.4 billion (FJ$3.65bn) in regulatory costs to try and tidy up the mess left behind from years of misconduct.
Investment bank Morgan Stanley says the big banks face an additional AU$1.1bn (FJ$1,67bn) in costs from new compliance programs that regulators will demand over the next three years.
Fines and customer remediation programmes are expected to cost the “big four” another $1.3bn (FJ$1.97bn) through to the 2020 financial year.
The Commonwealth Bank’s (CBA) AU$700 million (FJ$1.06bn) settlement over numerous breaches of anti-money laundering and counter-terrorism financing laws dominates the table of costs being racked up. Morgan Stanley bank analyst Richard Wiles says the headwinds are mounting against the banks.
“We think there is growing evidence that scrutiny of conduct is leading to civil proceedings, more customer remediation, and fines,” Mr Wiles wrote in a note to clients.
“The potential financial impact is hard to quantify, but we see higher conduct costs as a tail risk for the major banks.”
New civil actions
The big four have been under greater regulatory pressure since the Coleman Inquiry in late 2016 called for a tribunal to be established to help victims of bank misconduct.
The AU$6.2bn (FJ$9.42bn) bank levy raised in the 2017 Federal Budget — a tax related to budget repair, rather than bank misconduct — cut earnings by around threeto-four per cent.
But the bills are adding up
CBA’s has been fined Au$700 million (FJ$1.06bn). National Australia Bank (NAB), ANZ and CBA have been forced by Australian Securities and Investments Commission (ASIC) to pay AU$120m (FJ$182.28m) over bank bill interest rate rigging.
Westpac has agreed to refund 200,000 customers over failing to pass on discounts.
Last month NAB flagged a AU$100m (FJ$151.9m) provision to cover “regulatory compliance investigations” Last week, ASIC started fresh proceedings against NAB, which is just the first step in what the regulator said were, “broad-ranging and significant investigations currently underway into fee-for-no-service failures in the financial services industry”.
Profits will remain robust
Mr Wiles said AU$500m (FJ$759.51m) of further charges was his base case estimate, but it could be higher. “We estimate AU$835m (FJ$1.26bn) of charges in the 2018 financial year from matters which have already been announced,” he said.
“However, we think the Royal Commission will lead to further action and we factor in another AU$500m (FJ$759.51m) of charges in 2020.
“While this has not had a material impact on valuations, there is a risk that fines and customer remediation could emerge earlier and be greater than we forecast,” Mr Wiles said.
However, banks should have little difficulty footing the bill.
The AU$2.4bn (FJ$3.65bn) in compliance costs, fines and customer remediation represents only about 2.5 per cent of the expected more than $90bn (FJ$136.71bn) in cash profits the banks are expected to churn out in the next three years.