ANZ chief Shayne Elliott warns new banking era may produce unintended consequences
The nation’s banking sector is changing and being changed. ANZ chief Shayne Elliott cautions that unintended consequences need to be given serious thought in this post-royal commission era.
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ANZ chief Shayne Elliott has been in the top job for three years. But he says it feels a lot longer.
A wave of issues — from the need to face up to unpalatable truths unearthed by the financial services royal commission, to rising funding pressures and growing competition from a new generation of online lenders — means the certainties of the past two decades are no more.
And with ANZ facing accusations of cartel behaviour by the competition watchdog and still needing to complete the sale of its pensions arm to IOOF — stalled as that financial giant goes through its own issues — Mr Elliott readily acknowledges the end of the royal commission doesn’t mean it’s smooth sailing from here.
IT’S NOT GOING TO BE A REVOLUTION
RBA WARNS ON INTEREST-ONLY LOANS
“It could always be a bad year, as we have learnt there are a lot of things that happen that are unpredictable,” Mr Elliott tells Business Daily.
“I have been in this job three years. We had a get-together with our team a couple of weeks ago. None of us would have predicted some of the things we have seen in that three years.”
The banking industry is changing and being changed.
That process may be throwing up surprises, but Mr Elliott maintains ANZ recognised the nation’s financial ecosystem was transforming before most, and has moved to simplify its business to better serve customers and shareholders.
“We said distraction hobbies, things that are not core to our business, are going to cost us a lot of time, effort and money and we need to free ourselves of those,” he says.
“We started that three years ago, thank goodness.
“Yes we are still in the throes of exiting those businesses, but I am much happier that we have made those decisions than sitting here today with a full suite of things we used to do three years ago. If that were the case I wouldn’t be sleeping as well.”
CONFIDENCE IS KEY
There is a lot going on that could stop a bank chief from sleeping well at the moment.
For all of the concern raised by some in the finance industry about the threat a royal commission posed to the economy, Mr Elliott does not see it as the major risk for growth.
“I don’t want to underplay the royal commission changes; they will be profound, but given the nature of the recommendations they’re likely to be sort of slow burn and long lasting,” he says.
“They will not be the kind of thing we will implement next Tuesday morning and it will have a big impact on the industry.”
Mr Elliott believes the real fragility in the economy is to do with confidence.
“And a lot of it is related to the outlook for housing and therefore construction,” he says.
The way Mr Elliott sees it, most economic downturns are driven by growth slowing, unemployment rising and a downward spiral ensuing as households stop spending.
“This time that’s not the issue and that’s why it’s largely, I don’t know if it is unique, but it’s relatively uncharted territory,” he says.
“The potential slowdown here is not to do with the fundamentals of employment; unemployment is low and no one is suggesting it is going to change dramatically. It is to do with this idea of credit, restricted credit, confidence of borrowers and confidence of businesses which are quite fragile things, particularly if you are not careful.
“It would be ironic that after 27 or 28 years of economic expansion — and most of the world looks at Australia with envy — that any slowdown was self imposed because we weren’t confident as a nation about our opportunity.”
CREDIT CRUNCH
The road to hell to is paved with good intentions.
Mr Elliott doesn’t hold back when warning how efforts to take the heat out of the nation’s housing market could backfire.
While he notes the regulatory mandated crackdown on investor lending has been a success, the bank chief cautions that the nation now faces nervy property buyers unsure of the rules for the biggest purchase of their lives.
He sees potential danger in the push to shift interest-only property borrowers on to principal-and-interest payment plans.
In April last year the Reserve Bank of Australia noted about $480 billion in interest-only loans were due to reset over a five-year period.
The nation’s central bank has stayed calm about that process, pointing out most borrowers were well positioned to handle the switch.
Mr Elliott says there is no doubt it is more difficult to get an interest-only loan and warns that will put pressure on many households.
“What we’ve had is a bunch of people who took out a totally legitimate, responsible loan five years ago. They are coming up for their rollover which would automatically switch them to principal and interest,” he says.
“In the old days the banks would have entertained keeping them on interest only but that has become almost impossible.” Mr Elliott says this can create a “terrible situation” where a bank, applying responsible lending practices can only offer the borrower a principal-and-interest loan which could take more money out of their pocket than they can afford.
“The unintended consequences of that is that person says: ‘Well I can’t afford it so my only option is to sell the property’,” he points out.
“And you could — again this is hypothetical — end up with concentrated areas with lots of investors where you end up with a number of properties going on to the market at the one time, and we have seen that in Western Australia.
“Now we can argue whether that is a good or bad thing, but I’m not sure it is intended. One of the concerns I have is that what we don’t want to have is unintended consequences of regulation — not just royal commission — but other things that are changing.”
DON’T FORGET SAVERS
The threat of unintended consequences also extends to savers.
Mr Elliott singles out bank depositors as the royal commission’s “forgotten” customers.
“Somebody pointed out in the interim report they were not referred to at all,” he says.
“I’m not sure someone has had a forensic look at the final report in this regard but they (depositors) certainly haven’t really been thought about.
“There has been an assumption that when we talk about customers that we are talking about borrowers.”
And simply taking into account the needs of one set of customers could be dangerous.
“Our business is different than others — we have customers on both sides and we have more depositor customers than we do borrower customers,” he says.
“If, again out of good intent, we become completely focused on good customer outcomes for borrowers, it could be that in the process of doing that you could unintentionally harm depositors.”
Arguably the most controversial recommendation from the royal commission was a shake-up of how mortgage brokers are paid.
Commissioner Kenneth Hayne has recommended all upfront and trailing commissions be banned and, more fundamentally, customers pay for the services of a broker.
At present banks pay mortgage brokers — a scenario which raises a conflict where the broker could be viewed as working for what is in the best interest of the bank rather than the borrower.
The federal government initially adopted the ban on trailing commissions but backflipped in March following lobbying by brokers.
Federal Labor has pledged to ban trailing commissions if it wins the May election and will cap upfront broker fees at 1.1 per cent of the drawn-down part of each home loan.
Neither major party has adopted Mr Hayne’s recommendation to have the borrower — not lender — pay for brokers to arrange loans.
The broking industry has argue the changes would ruin the industry and benefit giant lenders such as the Commonwealth Bank which has a large network of branches that can be used to arrange loans.
ANZ, which gets much of its business from mortgage brokers, was always less enthusiastic of the suggestion than CBA boss Matt Comyn.
“I don’t think we’ve got a conflict; we happen to think brokers provide a very valuable service,” Mr Elliott says. “The public are voting with their feet. They think they are getting good value, good advice and good service from brokers so we support a consistent competitive offering.
“I would still much prefer people walk into my branch and came and got a deal from ANZ, but I acknowledge that customers have a choice and we are pro-choice in that sense.”
KEEP IT SIMPLE
Mr Elliott is working to produce a simpler ANZ.
The path to get there, however, is proving to be anything but.
ANZ’s attempts to offload its OnePath retirement savings unit has hit numerous speed bumps because the buyer, wealth manager IOOF, has been plunged into royal commission-induced turmoil.
The Australian Prudential Regulation Authority is trying to disqualify a number of IOOF’s top executives from managing people’s retirement savings.
The OnePath trustee, responsible for protecting the interests of OnePath members, must clear the deal as being in the best interests of the unit’s 700,000 members for it to proceed.
That will be tricky if a court decides the core of its historic management is not fit and proper to run a superannuation company.
Mr Elliott acknowledges that a lot needs to happen at IOOF for the sale go ahead.
“There is a lot of water to go under the bridge, there is a lot that IOOF needs to do,” he says.
“I know they are under stress at the moment they are going though enormous amount of change.
“It is within their ability to do the right thing.
“But these are not absolute decisions, they are always relative.
“You make the decision relative to the alternative — to it staying with us — and knowing that despite our best intentions, we weren’t brilliant at this business either.
“So we also have to be mindful of that.”
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