Big four banks back on investors’ radar

Major Australian banks are back on the radar of international equity investors following the Hayne inquiry’s final report.

At the banking roundtable were Credit Suisse managing director Jean du Plessis, left, Minter Ellison partner Rahoul Chowdry, Macquarie managing director Marianne Birch, Citi managing director Tom Cribb and Bank of America Merrill Lynch managing director Mike Evans. Picture: Hollie Adams

The major Australian banks are back on the radar of international equity investors, with the royal commission’s final report removing sovereign risk concerns about the sector that emerged over the past year.

A roundtable of top bankers and advisers to the financial services sector, hosted by The Australian, found that the local banks had lost their share price premium compared to their international peers as the Hayne hearings played out over 2018.

The upbeat financial market reaction to the big banks since the final report was delivered last week has been attributed to foreign investors buying the stocks again. The ASX banking index rose by 6 per cent last week, adding $22 billion to the market capitalisation of the local banks.

Minter Ellison’s financial services practice leader Rahoul Chowdry said the reputation of the Australian banking industry had taken a hit over the past year but confidence was being restored since the report was published. The Coalition has promised to implement 66 of the 67 recommendations in the report.

“There were concerns about the safety of our environment. I think there were questions around our sovereign risk and a lot of that has now started to recede as certainty comes through,” Mr Chowdry said.

“I think by shining this very bright light in some dark spaces, it gives the banks an opportunity do a big spring clean.

“I think what is really interesting is that report is a reminder that to generate long sustainable shareholder value, you actually need to look after all of your stakeholders, not just shareholders, and I think that is going to be a key focus going forward.”

Bank of America Merrill Lynch’s head of financial institutions, Mike Evans, said the local banks had fallen out of favour with international players who had switched final sector investments to other parts of the world. However, confidence in the stocks is now expected to return, with fears allayed that structural separation could be forced on the banks.

“If you look over the last 12 months across Asia-Pacific, Australia was very much underweight — and within the Australian market, banks were particularly underweight,” Mr Evans said.

“There were a number of factors that drove that. The royal commission uncertainty and concern over house prices were two of the macro issues that overseas investors have been focused on.

“As that uncertainty has lifted around the royal commission, part of the rally that we saw is a function of people coming back into the banking market.”

Citigroup managing director Tom Cribb said international investors had been circumspect on the royal commission and its prospective findings based on similar events in the banking systems overseas.

“A key issue is, you know, does this damage Aussie banks in the eyes of overseas investors?” he said. “A lot of overseas investors had concerns given the experiences they had. For example, in the US and UK with mis-selling and some pretty material fines and threats to the business models — and there’s still some risk there.

“We think at the end of the day, overseas investors would have preferred we didn’t get into a state of the world where we ended up with a royal commission in the first place, but there was a lot of relief towards to the final report in the immediate aftermath of its release.”

Macquarie Capital’s head of financial institutions Marianne Birch said the royal commission had delivered certainty to the future of the banks, especially in light of the lack of major surprises.

Ms Birch said the banks had dealt with regulatory change in the past and the sector would adapt to reforms put in place.

“I think the main thing for the report is that what people want is certainty. So I think the real benefit now is that we know what it says and we can move on,” she said.

“People had been second-guessing where it’s going and they’ve been adapting and responding now to what it says.

“This is an industry that is very used to regulatory change and it’s all ready to evolve and adapt to where it needs to be.

“It’s this certainty that creates confidence and that’s what you’ve seen since with the bank rally.”

The roundtable heard the Australian mortgage broking industry, which had been labelled a major victim of the final report, would survive the current bout of regulatory uncertainty.

The Hayne report recommended a shake-up of the industry, with trailing commissions to be phased out over the next three years in a move expected to damage the sector’s future revenue growth.

The Coalition stopped short of implementing the recommendation that customers pay the mortgage broking fee upfront. However, Labor has promised to put the change into practice, which would restructure the way mortgage brokers are paid.

An estimated 60 per cent of all mortgages in Australia are originated through a broker.

Mr Cribb said it was likely that the mortgage broking industry would adapt to the changes, with consolidation among the players a likely outcome.

“We wonder a little bit about the business model and whether the business model, on a stand-alone basis, continues to make sense,” Mr Cribb said.

“Do these businesses start to merge with each other or with complementary businesses to try and create more diversified earning streams and justify the product they sell?”

Credit Suisse managing director Jean du Plessis said the mortgage-broking industry would need to “reset” future earnings projections as a result of the royal commission recommendations.

“The mortgage-broking industry is not going to go away,” Mr du Plessis said.

“I mean, certainly for us the unexpected significant consequence of the report was its impact it could have on the intermediary channel.

“So on the current trajectory we would expect there to be a resetting of earnings and that’s really through a combination of increased costs and reduced revenue.”

Ms Birch said mortgage broking provided competition within the home lending sector, but said the industry would adapt to the regulatory changes.

“More than 60 per cent of mortgages are sold through brokers, so they have a very meaningful role to play from a competition perspective,” she said.

“The royal commission does comment around how they work today and how they should work in the future but I think we have seen in the past the industry has adapted and will respond to regulatory change.

“None of us around the table have the answer of how that works and maybe direct (selling) of mortgages becomes a more meaningful channel than it is today. But that doesn’t mean to say that brokers don’t adapt and evolve based on regulatory change.”

Mr Evans said the Australian banks’ earnings were going to come under pressure in the future as the sector implemented the recommendations and dealt with the report’s fallout.

“There’s no doubt that this will create a lot of headwinds from a cost perspective,” he said.

“The banks are going to need to invest a lot more in compliance, risk management … in addition to that, you know they are going to be conduct-related charges that come from the continuing investigation.”