Shayne Elliott, the CEO of the ANZ Bank, appeared before the the House of Representatives economics committee in Canberra today.
Here are his opening remarks (with some headings added by Business Insider):
I assumed the role as ANZ’s Chief Executive 9 months ago and as such I am accountable for the Banks performance in all respects.
It is my responsibility to ensure that the culture, values and behaviours of our 60,000 people, combined with our standards, policies and procedures, deliver a fair, transparent and balanced outcome for all stake-holders.
I take that responsibility very seriously, but in truth we have not always met the standards we set for ourselves or that the community rightly expects of us.
Each time we fall short, we potentially harm a customer or member of the community and for that I apologise.
When we fail our customers, it is my job to take accountability, apologise, fix it for the customer as quickly as possible, and make the changes required to stop it happening again.
Public scrutiny and accountability over what we do and how we behave is a fair part of the process and today is part of that.
I hope these appearances will allow me to answer your questions on the matters set out in your terms of reference.
I know there are also other issues members wish to discuss.
I have asked my Deputy, Graham Hodges to join me today given his in-depth knowledge of some particular matters.
I realise you will have a lot of questions, but I wanted to make a few opening comments.
We are in business to serve customers. If we do so successfully, we will generate a decent return for our shareholders.
Those shareholders provide the foundation of equity — the equity which is required first and foremost for the bank to attract deposits and make loans.
Without shareholders we cannot serve our customers. Without customers we have no business.
While on many measures we are a large bank, we are 16% of an open and competitive market.
Traditional competition is intense and has seen the margin charged by the industry between loans and deposits halve over the last 20 years. That trend is likely to continue.
As we have seen in other industries like retailing, media and communications, it will be new technologies and business models that will deliver better results for consumers and greater competition.
Near universal access to high speed internet, big data, block-chain, peer-to-peer and new payment options are already changing banking and over time will further empower consumers.
This is a good thing.
The ongoing reality of new and old competition pushes us hard every day to improve, and we invest shareholder funds each year to be faster, better and cheaper for our customers.
Recent examples include free mobile banking services like GoMoney and ApplePay or low cost options like ANZ Smart-Choice-Super.
The ANZ that I will lead stands for 6 important principles and we should be judged against them:
First, we should offer services that are easy to understand, competitively priced and designed to meet customer’s needs,
Second, we need to ensure customers get the right products for their individual circumstances,
Third, when customers get in to difficulty, or when we fail them, it is our responsibility to work with them to find a fair and balanced resolution,
Fourth, we should be quick to fix mistakes and stop them happening again,
Fifth, when making decisions that affect our customers, we need to explain them clearly,
And finally, we need to ensure that our culture, systems and processes are aligned to produce the right results for customers.
There are three other issues I would like to comment on:
- how we make interest rate decisions, and
- some high-profile matters where we have clearly failed our customers.
- I want to explain what we have done to achieve a fair and balanced resolution.
Bank returns and profits
There has been much debate about whether profits and the return on equity for Australian banks is too high.
I have circulated a few charts to help explain our perspective
We reported an annual profit last year of around $7.5 billion and by anyone’s measure that is a lot of money, but we are a very large business with assets of almost $900 billion.
Those assets are primarily the loans we make to our customers.
So while our profit is large, it is less than 1 cent per dollar of assets we hold.
Governor Lowe rightly pointed out that the average Return on Equity for the industry in the past decade was around 15% – noting it was similar to the decade prior.
But it is important to look at the trend of returns within the most recent decade.
For ANZ, we started at almost 20% and have trended down to a little over 12.
Returns in Australian Banking are trending lower.
That has largely been driven by 2 factors:
1. a competitive market which delivered better pricing for customers, and
2. the cost of strengthening our balance sheet which meant raising more equity and holding more liquidity, to ensure we are “unquestionably strong”.
This strengthening has been a sensible and pre-emptive response to protect Australians from the havoc caused by the 2008 crisis in the US and European banking systems.
But it does come at a cost to shareholders and customers.
As you can see from my chart pack, the ROE of the banks has been significantly less than other sectors in Australia over 1, 5 and 10 years.
Our returns are also about the same as that experienced by leading banks in developed markets, particularly if one adjusts for the fines paid by US and UK banks in recent years.
Returns from banks in Europe are certainly much lower, but this is due to the near failure of their system and the 483bn Euros of tax-payer funds used to re-capitalise the banks after the crisis.
Despite that capital injection from tax-payers, European banks still struggle to fulfil their role as a provider of credit and a catalyst for economic growth, and returns remain extremely low.
Finally, while Return on Equity is an important measure of financial performance, it is not the return our shareholders receive.
They receive the dividend, plus any appreciation in our share-price.
On that measure, called Total Shareholder Return, ANZ shareholders have received an average annual return a little over 9% in the past 10 years, and saw a loss in 4 of those years.
So, shareholders have not always won.
I know the committee is interested in how we set interest rates.
Borrowers and depositors are very sensitive to rates.
The rate we offer is our main competitive weapon, so being competitive is an absolute must.
We need our lending rates to be as low as possible to retain and grow our lending business, while still maintaining a fair return for depositors and shareholders.
While the RBA cash rate is an important ingredient in our cost of funds, it is not the only ingredient.
There are three main sources that provide the funds we need to lend to customers:
1. The equity provided by our 550,000 shareholders, most of who are Australian retail investors and their superannuation funds. This is the cornerstone of our balance sheet. Shareholders take the risk and expect a decent return. Without their capital, there can be no lending.
2. The deposits provided by both individuals and companies. This is the pool of funds that the RBA rate influences most directly but it is only 60% of our funding base.
Australian banks don’t have enough deposits to fund the demand for borrowing, so our third source of funds is the domestic and international capital markets. In these markets we must pay a rate competitive with other domestic and international borrowers.
So when the RBA changes rates, it directly impacts some but not all of our funding costs.
This year, to balance the interests of stakeholders and take account of competitive pressures, we cut our lending rates, held or increased deposit rates and cut our dividend to shareholders.
Over the last few years, Parliament has examined aspects of our industry’s behavior. This has helped shed light on cases where my bank has failed some of our customers.
I say this to acknowledge our failings and the role Parliament plays in holding us to account.
Let me be specific:
In 2010, we acquired the farm lending business of Landmark.
We accept we should have worked better with customers, particularly where they were already in trouble.
This was wrong and we apologized.
However, we have changed our processes, increased our resourcing and resolved nearly all outstanding cases.
Second, we were one of the lenders to Timbercorp, one of the Managed Investment Schemes that collapsed around the time of the GFC.
We did not lend directly to people who invested in the schemes nor advised them to do so.
We have however worked with the liquidator on a hardship program for those investors in financial distress.
We are also working to help shape a last resort compensation scheme, which we will help fund, for victims of poor financial advice where their insurance fails.
Third, we agree that giving small businesses better access to dispute resolution is critical. The challenge is to keep it simple, accessible and efficient, while building on the achievements of the Financial Ombudsman Service. We acknowledge that the Ramsay review is looking at this.
Fourth, we are working to repair several situations in our Wealth businesses where we have failed our customers.
We are making it right for customers, fixing systems, supporting industry reforms, like the bad apples register, and have reviewed our medical definitions and processes within our Life Insurance business.
And finally, we are working with our industry on significant improvements regarding remuneration, whistleblowing and the Banking Code of Practice.
We recognize that the Government has a full agenda of other reforms, including product intervention powers, revised competition laws and better funding and enforcement for ASIC.
Strong laws and regulators underpin the integrity of our financial system and are in everyone’s interest.