ANZ’s Elliot denies record profits reflect lack of competition

ANZ chief Shayne Elliott cast a cloud over the bank’s impending results, saying small business loan losses are rising.

Shayne Elliott exits after appearing before the standing committee. Picture: Kym Smith

ANZ chief Shayne Elliott has cast a cloud over the bank’s impending results after revealing small business loan losses are rising, widening the fallout from parliamentary hearings that are exploring ways to increase competition and mulling regulatory changes.

Building on Commonwealth Bank chief Ian Narev’s appearance before the inquiry of the major banks, Mr Elliott yesterday took the baton to argue the industry’s profitability wasn’t drastically outpacing other nations, apologise for wrongdoing and deny that ANZ had a “blokey culture”.

He also struck back at calls for the banks to pay for the perception the government will bail them out, a “subsidy” the Reserve Bank claims is worth up to $3.7 billion a year due to stronger credit ratings assigned by ratings agencies on the basis of support.

“There is a quid pro quo here ... you could argue ... our shareholders are paying for that by having to hold higher levels of capital to support our business as opposed to others,” Mr Elliott said, referring to the regulator’s capital levy imposed on “systemically important” banks.

While conceding banks had “lost touch” with customers, Mr Elliott denied that simultaneous record profits reflected a lack of competition and assured MPs that poorly aligned remuneration structures were being reviewed while badly behaving staff were being sacked.

In a major commitment to emerge from the inquiry, Mr Elliott vowed to “lead” the industry in offering cheaper headline credit card interest rates with the help of new technology and improving risk-based pricing tools.

Like Mr Narev, Mr Elliott backed other consumer measures, such as rate-tracker mortgages — products that are priced by a margin above the cash rate and follow official changes — saying these were being “actively” assessed by ANZ but demand might be limited because they are more expensive than variable rates.

But he was more defensive on the big banks’ return on equity, arguing it was not out of kilter with other nations when banks’ relative cost of capital was considered.

With many MPs probing the rise in the banks’ margins on small business loans relative to the cash rate to a record high in recent years, Mr Elliott said the pricing reflected greater risks and regulatory changes that required banks to have 60 per cent more capital in those lending books than plain vanilla home loans.

He added ANZ suffered 10 times more losses from residentially secured small business loans than owner-occupied mortgages, with loss rates being 136 times higher when the debt was unsecured.

“We are recognising the risk is higher today — that we were misprising risk in the past,” he told the House of Representatives standing committee on economics in a testy exchange.

“The numbers I am giving you are not hypothetical — they are factual.

“(And) If I just look in the more short term … the reality in Australia today is the risk in small business is increasing.

“Part of that is to do with the downturn in mining in certain parts of the country, but as a more broad-based comment, there is stress being felt in small business and loss rates … are increasing.”  With investors viewing the hearings more as “noise” than impacting share prices and dividends, Mr Elliott’s flagging of bad debts provided added interest after the bank recently boosted provisions by $145 million to settle a legal dispute.

ANZ is heavily exposed to resources companies and Asia, with the bank suffering a $100m blowout in bad debts in the first half as the slump in commodity prices took their toll.

The Melbourne-headquartered bank reports full-year (to September 30) results on November 3.

Mr Narev said CBA was also experiencing stress in mining regions.

ANZ already cut its interim dividend and has been winning plaudits for running off low-returning institutional lending assets to boost ROE, which sank to 9.5 per cent in the first half as Mr Elliott cleared the decks with writedowns and restructuring charges.

In documents tabled yesterday, ANZ said the “pro forma” ROE would have been 12.2 per cent, below the 10-year average of 15.6 per cent.

In the past year, they showed the big four’s ROE was 15.5 per cent, in line with Canadian banks and above comparable lenders in Scandinavia and the US.

Returns are topical after the government ordered the bank CEOs to appear before the committee to explain their move to hold back half the Reserve Bank’s August rate cut from homeowners, and quell Labor’s push for a royal ­commission.

Mr Narev warned it would be “dangerous” to regulate the industry’s profitability, claiming the broader economy relied upon strong banks — a more desirable outcome than reducing returns through regulations.

Mr Elliott said in Europe, citizens have had to “pay” for the banking system by injecting €483bn to bail out banks “because of their low returns” and Scandinavian banks were difficult to compare after being forced to increase capital levels “extremely high”.

“I actually think the returns here, when you look at the relative cost of equity in those markets, our returns are not outside our international peers,” he argued.

Mr Elliott also claimed that the return shareholders received was capital gains plus dividends, and they had suffering losses in four of the past 10 years — showing they had “not always won” at the expense of customers.

But he struggled when pressed about why banks take longer to pass through mortgage rate cuts than hikes to borrowers, admitting it produced profits and that the public may be “cynical” about the issue.

“If some of our cost of funds goes down, the longer we delay, clearly that is an advantage to the bank,” he said, noting RBA cash rate changes were only one input into bank funding costs.

“It’s our responsibility to pass those as quickly as we can and we need to take into account the change in costs and what our competitive position is going to be.

“What’s the rate we’re going to be competing with tomorrow morning at 9 o‘clock in our branch network — that’s a really important consideration.”

Mr Elliott said ANZ was the smallest of the major banks by market share at around 16 per cent and had to “fight” every day.

He said there was “no significant evidence” linking customer satisfaction research with how people chose banks, driving ANZ to focus on the advocacy approach known as the net promoter score.