No benefit by damaging banks
AS the last of the big four banks to report, Westpac has made it unanimous — the cost of reimbursing customers for the bad behaviour exposed by the royal commission has been trivial in terms of their profits.
Like the other three, while the repayment costs ran into the hundreds of millions of dollars, they essentially only knocked off what would otherwise have been the usual increase in each bank’s profit.
And that’s, importantly, when you take the cost of repayment of fees that should never have been charged over a number of years all into just one year’s profit.
Probably the simplest metric which captures this is that not one of the banks had to cut its annual dividend.
Indeed, the CBA — which took the biggest hit, an extra $700 million, thanks to its one-off debacle over its “too-clever” so-called “intelligent” ATMs (unfortunately, combined with not-so intelligent staff) — actually had the arrogance to alone increase its dividend, by 2c.
Now there are two broad ways to look at this reality.
This is that either the banks “got away with it” — whether you want to define “it” as arrogance, customerwhile gouging or outright criminality. Or that despite all the outrage and damming headlines, their behaviour actually wasn’t really all that bad.
If you can pay off, say, half-adozen years of bad conduct all in one year and hardly dent that year’s profit, judged against the size of your business and the customers you did not rip off, that must have been tiny.
But either way, it is a very good thing that the customer remediation did not devastate bank results. No one would benefit from our banks being seriously damaged, even if they had “deserved it”.
We have arguably got the best possible outcome — still-strong banks that now will, or at least should, behave properly, both in terms of individual customers and their broad approach to banking.
Two other big points emerge from the numbers.
First, if you are going to have a RC which could cost banks serious money, you could not have picked a better year to have done it than the 2017-18 year.
All the bank results showed that it was a golden year for doing banking business, but that the gold had started to tarnish in the closing months.
It was thanks to bad and doubtful debts falling to extraordinarily — and almost unbelievably — low levels, lending and interest margins only really came under some pressure in the last three to six months, that they were able to absorb those costs.
Heading into 2019 the banks now face significant cyclical pressures, as loan demand abates, more loans switch from interest only to interest and principal — and so defaults are likely to rise — while offshore interest costs will also rise.
Further, while the specific remediation costs of the RC might have been relatively small, the increased regulation and the elimination of ‘soft’ income sources in the wealth space, will produced a secular shift down in profitability.
Westpac confirmed to me that, as I’ve noted with the other results, a permanent shift down in bank profitability to the 11-14per cent return range (Westpac’s was 13 per cent), with CBA at the top around 14-15 per cent. Always be careful about getting what you wish for. A strong banking system is the absolute foundation of not just our economy but a functioning society.
Seriously hurting them would not have been a good outcome. Maybe we stumbled into a reasonable balance, that not only “fixed” the problem but makes for better banks longer-term.
NO ONE WOULD BENEFIT FROM OUR BANKS BEING SERIOUSLY DAMAGED, EVEN IF THEY HAD ‘DESERVED IT’