Big Mac warns of earnings squeeze

Australia’s big banks will each lose hundreds of millions of dollars in fee revenue in coming years in the wake of the financial services royal commission, analysts say.

Australia’s big banks will each lose hundreds of millions of dollars in fee revenue in coming years in the wake of the financial services royal commission, analysts say.

And the nation’s banks are now “severely hampered” in their ability to cut interest rates on deposits in line with reductions in the cash rate, ­according to separate research.

In a report for investors, ­analysts at investment bank Macquarie have said they ­expect earnings and dividends at the big four retail banks to come under pressure as they look to improve their standings in the community.

Banks had so far focused on compensation but their attention would soon move to ­ongoing fees, they said.

In his final report, royal commissioner Kenneth Hayne made 76 recommendations.

The Commonwealth Bank and ANZ were more likely to be affected by fee reductions than National Australia Bank and Westpac, the analysts said.

But Westpac would find it challenging to maintain its dividend at current levels, they said.

Macquarie expects the pool of underlying fees at each bank to contract by $350 million to $650 million between last ­financial year and 2020-21.

According to Reserve Bank research published last month, total fee income across Australia’s banking sector clocked in at $12.98 billion last financial year. That was down 0.4 per cent from the previous year, but fees from households fell a deep 6.5 per cent to ­$4.19 billion while fees from businesses climbed.

Increasing competition and a desire to improve their standings were the catalysts for fee reductions, the ­analysts said.

There was heightened pressure for banks to ­reduce penalty and exception fees — such as those charged when customers do not have enough funds to cover direct debits.

“Following the findings from the royal commission, banks are looking to improve customer outcomes,” Macquarie said.

“In the first instance, this was mainly in the form of identifying previous issues and looking to remedy them. ­However, the latter step is the removal of products and fees.

“We expect regulatory pressures and a more focused approach on customer outcomes to put pressure on these fees.”

Analysts at investment bank Macquarie said they ­expect earnings and dividends at the big four retail banks to come under pressure.

In his final report, royal commissioner Kenneth Hayne made 76 recommendations, ­including changes to laws governing the financial industry, after extensive misconduct was uncovered. The probe revealed instances where banks had charged fees to dead people and charged fees where no service was provided, costing the major banks and AMP hundreds of millions of dollars in remediation payments.

Disclosures by the banks, as well as RBA research, ­highlighted a “persistently challenging” environment for banking fees, which had grown at an average of 13 per cent a year between 1997 and 2007, Macquarie said. Growth had slowed to ­single digits since 2008, the ­analysts said.

Fees related to deposits from households and businesses had “come under pressure as banks continue to compete aggressively in attracting deposit funding,” Macquarie said.

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More recently, the removal of ATM fees was among factors at play, they said.

In separate research yesterday, Credit Suisse analysts said that, with the cash rate now at a historic low of 1 per cent, banks would struggle to pass through further rate cuts.

“The ability of the banks to pass through the majority of the cut is severely hampered in our view unless further material earnings impacts are felt or the impact of each subsequent cut is dampened,” they said in a research report quoted by Bloomberg.

The Australian