CBA has most to lose from banking royal commission, says Bell Potter

CBA will likely lose the most if Kenneth Hayne’s bank inquiry leads to a mortgage broking overhaul, says Bell Potter.

A Commonwealth Bank branch in Brisbane. Picture: AAP

Commonwealth Bank will most likely lose the most of the big four banks if Kenneth Hayne’s royal commission overhauls the troublesome mortgage broking industry.

Bell Potter financial analyst TS Lim today warned clients any regulatory outcome from the year-long inquiry into banking and financial services would likely result in a drop in broker loans being sold to the major banks, along with higher compliance costs.

The royal commission in its first two weeks of hearings has revealed widespread home loan fraud among Australia’s biggest banks and mortgage brokers. CBA-owned mortgage broker Aussie Home Loans came under fire after executives revealed it lacked a system to detect loan fraud and outsourced the responsibility to other lenders such as Westpac, Suncorp and Bankwest.

ANZ’s executive general manager home loans and retail lending William Ranken revealed the bank does not check information provided by brokers about their customers’ living expenses.

An investigation by the Australian Securities & Investments Commission revealed large banks that owned or held controlling stakes in mortgage brokers received an outsized share of home loans sold by the brokerage. CBA (CBA), which controls 25 per cent of the mortgage market, won almost 40 per cent of loans sold through Aussie. National Australia Bank, which owns three large aggregators, and Macquarie, which has significant investments in Yellow Brick Road, also saw more loans coming through the door compared to their overall market share. Productivity Commission chair Peter Harris, who is currently examining competition in the financial system, has zeroed in on the relationship between banks and brokers.

Mr Lim said mortgage broker-originated loans accounted for 10 per cent of both Westpac and CBA’s profits. For NAB it was 7 per cent and for ANZ it accounted for 9 per cent.

“ANZ should be least impacted among the majors, while CBA would be the most impacted,” Mr Lim said.

“Major concerns have been raised over misconduct matters and the potential for upfront and trail commissions to create conflicts of interest — nothing new here — and these will probably have negative implications for related broker originated volumes and regulatory and compliance costs going forward,” he said.

For CBA, broker originated loans are worth $41 billion to the bank on an annualised basis. For Westpac, it amounts to $35bn. At risk for ANZ is an annualised $38bn and for NAB, $28bn.

“In any case, the inquiry is designed to ensure the financial system is working efficiently, effectively and fairly,” Mr Lim said. “Unfortunately, there will be a federal election in the middle of next year and the likelihood of a real circus emerging under a different government (no laughing matter when it comes to granting the public’s secret desires) cannot be fully discounted.”