November 30, 2018 / 5:58 AM / 11 days ago

Breakingviews - Smarting Aussie lenders brace for Banking 2.0

FILE PHOTO - A combination of photographs shows people using automated teller machines (ATMs) at Australia's "Big Four" banks - Australia and New Zealand Banking Group Ltd (bottom R), Commonwealth Bank of Australia (top R), National Australia Bank Ltd (bottom L) and Westpac Banking Corp (top L). REUTERS/Staff/File photo

SINGAPORE (Reuters Breakingviews) - The curtain is falling on a dramatic inquiry into banking misconduct Down Under. Commonwealth Bank of Australia and others have been battered by the findings of the Royal Commission, with $39 billion wiped off the value of the Big Four lenders this year as investigators found banks taking fees from dead clients’ accounts and pressuring vulnerable borrowers. As the show winds down, investors should brace for a big shake-up.

    It has been part inquest, part catharsis. Nine months of bad headlines left lender reputations in tatters, and made media stars of meticulous interrogators. Two years ago, Prime Minister Scott Morrison dismissed the proposal to launch the commission as a “populist whinge”. Now his government has little choice but to implement its recommendations.

    For all the ugly press, the country’s dominant lenders - CBA, Australia and New Zealand Banking Group, Westpac Banking Corp and National Australia Bank – are still among the world’s most profitable, and remain well-capitalised. Share prices show it: CBA still changes hands at nearly twice its book value. But after decades of growth that encouraged complacency, there are big ructions ahead.

    For starters, banks are being pushed back to basics. The Big Four have already retreated from overseas and are reversing a two-decade trend of snapping up wealth managers and brokers, while decluttering products and processes. That increases already hefty dependence on the domestic market, mortgages in particular, when Australian household debt levels, at 122 percent of GDP, are among the world’s highest.

    Pricing power is coming under pressure too, and wholesale funding costs are set to rise. Technology might help larger players, but may also attract upstart challengers.

    Thirdly, there will be credit rationing as loan officers grow conservative. This may not tip the economy into recession, as some warn, but it’s a risk.

    Harsher enforcement is another outcome. No new rules, perhaps - the interim report warned they may not help - but punishments could extend to criminal charges.

    The final piece will be a campaign to change attitudes and governance - although NAB chairman Ken Henry suggested shaking up culture could take a decade. Some incentives and fees could be banned, and executive remuneration reconsidered. This Royal drama might run to more acts.

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