Near the start of this year in an analyst briefing, the chief executive of Australia’s biggest bank, Ian Narev, gave an uncharacteristically blunt assessment of how the country’s financial institutions are treated in public debate.
The Commonwealth Bank boss said: “Our job, unfortunately, is we’ve got to keep focused on the right balance between their [mortgage customers’] needs, deposit holders needs, and the needs of 800,000 Australians who own the shares directly and millions more through funds and realise at any given time one or more of those group of stakeholders are going to hate us,” he said.
“And that’s just life running a big institution and what I’d like to think will happen if I’m under that situation is what’s happened before, which is just we’ll take the heat and continue to focus on what the right long term balance will be.”
“But I don’t think the debate is going away anytime soon.”
As it turns out, that debate does appear to have gone away.
We haven’t had a good bank bashing session for a while. The phenomenon appears to have slunk from front stage to the backroom.
This blood sport has in the past been considered a safe issue politically, almost equal to that of whaling where any comment condemning it is met widespread approval.
Most people have some dealings with a bank, if not their life’s biggest investment, a mortgage.
So any criticism has resonance because paying fees is never pleasant and any delay in passing on an official cut in interest rates is taken personally.
A quick review of media coverage of the last few years shows bank bashing peaked in 2010 in the aftermath of the Global Financial Crisis when financial institutions were getting it in the neck for the world’s woes.
Since then, interest rates are at a 60 year low and mortgage payments have reduced. Not likely to be much whinging from bank customers about that.
And the Australian government has changed to one less likely to administer a kicking to banks. The political will isn’t there for a sustained attack.
With interest rates stable, the complaint about the time lag between a fall in cash rates and mortgage rates doesn’t apply.
The test will come when, and eventually it will, rates start creeping up again. Will there be the same lag between moves in official rates and home loans?
Perhaps also the banks are getting better at dealing with customers.
From a grassroots level, the number of complaints against financial institutions have fallen for the first time in many years
The latest numbers from the Financial Ombudsman Services show a fall, for the first time in four years, of 11 per cent to 32,307 complaints.
Most grumbles are still about credit, including home loans and credit cards. The big decline has been complaints from those in financial difficulty, a sign of improved governance or the fact that lower payments make it easier to pay loan interest.
In the past few months there are signs that the Australian domestic economy has been picking up in some areas. People are undoubtedly feeling better now than they were when the financial crisis hit. Retail spending has started to pick up, the share market capital gains have been good and housing prices are lifting as confidence gradually returns.
But in the past few years, many Australians have been feeling the pinch. Unemployment has slowly ticked up and power bills are a big pain point in the running conversation about Australia’s generally high living costs by world standards.
Where this gets interesting is that the big four banks have just reported record results, with a combined profit of $27.4 billion for 2013.
Traditionally this would trigger howls of protest across the country and more restrained expressions of concern from political leaders.
This year, not a peep.
There’s always a sneaking suspicion that profits are so good because banks haven’t passed on full cuts in rates, preferring instead to keep a larger interest rate margin.
However, EY, in its latest Banking Agenda report, says there’s actually been a decline in the net interest rate margin — the difference between the money a bank lends and what it pays out for money borrowed such as deposits.
Paul Siviour, banking and capital markets at EY, says the banks continue to struggle to generate lending volumes.
Corporate Australia, like home owners, is reducing borrowing, paying down debt. This means growth in borrowing isn’t there anymore.
The banks are getting results through cutting costs and fighting hard for a share of business.
EY’s Siviour says the results in this year’s reporting season may mark a tipping point back to growth for Australia’s banking sector.
“However, it’s unclear whether we are witnessing a substantive recovery or simply a re-positioning for growth based on the new order in banking.” he says.
The banks are holding their own against competition from non-bank lenders. The major banks have 78 per cent of housing loans, 61 per cent of personal lending and 76 per cent of business credit.
PriceWaterhouseCoopers says there is no doubt competition for mortgages and business loans has increased in the past year. PwC points to higher payments to loan brokers and “cash back” payments to new borrowers.
The banks achieved loan growth but only at the expense of margins. The banks have to spend, or give, more to win new business.
But the new business being written tends to be good and less likely to turn into bad loans. PwC: “The bad debt expense has continued its recent downward trend, dropping a further 15.7 per cent in the last six months.”
The Future: Australian banks are focusing on customers through digital initiatives, using customer analytics and evolving ideas about the role of branches. The PwC Banking Gauge, a consensus view across four leading banking analysts – predicts that the four major banks will deliver cash earnings growth of 5 per cent in 2014 and 5.5 per cent in 2015.
Key Numbers the major banks:
Cash earnings: Rise by 9.5 per cent to $27.4 billion. This translates to 4.2% growth in second half underlying cash earnings relative to the first half.
Return on Equity: 15.9 per cent for the 2013 financial year from 15.5% for in 2012.
Credit Growth: Credit growth remained stubbornly low for the fifth year in a row at 3.3 per cent for the year to 30 September 2013, says PriceWaterhouseCoopers. Home buyers in New South Wales, Queensland and Victoria are leading in borrowing. These are existing home owners. First home buyers are shrinking. Business borrowing is weak.
Deposit Growth: Total bank deposit growth of 8.2 per cent for the year to September 2013 was down a little from the 9.9 per cent in the year to September 2012.
Expense to Income Ratio: 45.1 per cent in the 2013 financial year, an improvement of half of one percentage point. Essentially what a bank spends to create its revenue.
Staff Costs: The number of employees fell 1.1 per cent over the year to 170,242. Average salary costs per person rose just 2.5 per cent
Net interest Margin: “We continue to expect further downward pressure on net interest margins driven by competition for lending in a subdued market and competition for deposits,” says PriceWaterhouseCoopers.
An opportunity for bank bashing will emerge soon when the federal government announces the terms of reference for the inquiry into the financial services sector.
Competition between banks will be a big question along with risk.