Terry McCrann: Royal commission raises question of priority as it probes the big four banks

THE Great Financial Industry Royal Commission of 2018 is off and, well, crawling. It opened to a blaze of interest — and then promptly went “publicly dark” for a month, writes Terry McCrann.

WELL, the Great Financial Industry Royal Commission of 2018 is off and, well, crawling. It opened to a blaze of interest — and then promptly went “publicly dark” for a month.

Counsel assisting, Rowena Orr, closed the day’s — for want of a better term — proceedings, by stating the RC was not “adversarial litigation, it is an inquiry”.

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That was a tad hard to reconcile with her earlier comments there was evidence that suggested consumers had not always been treated honestly and fairly; and that “some of these events may have involved breaches of the law”.

Or indeed, with the RC’s formal title: into MISCONDUCT in banking etc. I doubt either the title or Ms Orr’s observations referred to CUSTOMERS.

It’s early days — correction: day — so I’ll just make some broad observations.

I doubt either the RC process itself or its outcome is going to make anybody happen. There are huge expectation gaps which are going to remain unbridged.

This was always going to be the case, given the RC’s provenance and I would add, pointlessness. Two things suggest that more acutely.

First the decision to limit it to already litigated matters — I guess that might have been what Ms Orr meant by her comment.

Rowena Orr flanked by Mark Costello and Eloise Dais.

In a more basic sense, it means it will be tilling over already well-tilled, if unsatisfactorily, ground.

Secondly, there’s the number of submissions that have been made. So far, it has received 385 from the public via its website.

No, that’s not 385k just 385. Despite Ms Orr’s addition of the words “and increasing each week”, this does not seem to me to be a particularly large number in the context of 47 million customer relationships with the four big banks alone and the hundreds of billions of financial transactions stretching back over the 10 years of the RC’s focus.

I sincerely hope we have not embarked on a Seinfeld RC. Clearly the big banks in particular, but indeed ALL financial institutions, would be well advised to fall over themselves in co-operating with the RC.

A cynic would suggest that given the RC’s very tight time-frame and very broad F2 field of vision, there’s “safety in too much numerical information.” I would simply advise that (full and complete) honesty is the best policy.

Finally, are we going to come to look back on Monday as another one of those days of great historical irrelevancy? If indeed, we ever “look back at it” at all?

The market turmoil that acted as “prologue” suggests to me as 2018 unfolds and even more as we move into 2019 and the RC presents its “conclusions” and “recommendations”, we are going to have other, bigger, matters to concern and occupy both the policy and political spaces and even more the functional economic and financial realities than drawing guidance for that future from a rather musty Monday.

SURPRISE! SMALL BANKS ‘CAN’ TOO

TWO points of particular interest struck me in the Bendigo profit detail; plus, a perhaps surprising observation about a potential advantage in the coming world of rising interest rates.

It’s the Wicked Quartet of big banks — a Quintet if you add Macquarie — that’s supposed to be the terrible gougers of customers.

After all they are the REAL target and focus of the RC; the rest are just making up the numbers.

So what a “surprise” it was to see that it was “battler’s buddy” Bendigo that lifted its net interest margin all of a thumping 18 points — from 2.18 per cent in the 2017 first half to 2.36 per cent in the latest half.

In comparison, banking’s “public enemy #1” the CBA only increased its margin by 5 points; and at 2.16 per cent in the latest half, CBA is operating on a somewhat thinner margin between what it pays depositors (and other money providers) and what it charges borrowers.

Hmm, I wonder “which bank” is gouging us now?

Bendigo has also built a very nice little earner with its Homesafe operation in partnership with Peter Szabo. This is where homeowners “pre-sell” a portion of their property and keep living in it until they sell the rest in a normal sale/auction.

Yes, Homesafe only directly contributed around $6 million to Bendigo’s $225 million interim profit.

The head of the royal commission Kenneth Hayne.

But it’s quietly building up a much bigger payday, by the way it works and the way Szabo and Bendigo limited it to the Melbourne (with 61 per cent of Homesafe assets) and Sydney (39 per cent) markets.

Thanks to the booming market and that Bendigo has had the business totally to itself — the big banks didn’t follow it in — it is now sitting on tasty capital profits.

From a zero starting point a decade ago, Bendigo’s Homesafe property portfolio is now up to $710 million on funding — essentially what it paid out to homeowners — of just $387 million.

The accelerating gains delivered by the market are captured in the rise over the past year: property value up $86 million, funding (essentially payouts) up just $26 million.

Now the observation: banks are supposedly going to be challenged by rising interest rates.

Correction: BIG banks are going to be challenged by rising US rates because they borrow around 40 per cent of their funds in the US wholesale market.

In contrast, Bendigo borrows only 13 per cent in wholesale markets.

It’s now going to pick up — yes, a slight, but nevertheless somewhat surprising, competitive advantage against the big banks — because the local official rate ain’t going to rise anytime soon.