Regulation, rising costs hurting smaller banks, warns Heritage Bank chief

Smaller banks are being disproportionately hit by new regulation and costs in the sector, Heritage Bank CEO Peter Lock says.

Heritage Bank CEO Peter Lock.

Smaller banks are being disproportionately hit by reams of new regulation and costs in the sector, Heritage Bank chief executive Peter Lock has warned as he urges policymakers to take a more granular and measured approach to any new laws.

Mr Lock said while customer-owned banks had sidestepped the scandals of the Hayne royal commission, they were being slapped with the same level of regulations.

“The ongoing cost of regulation plays out in so many different ways,” he said. “It’s hard to keep up... when it comes down to (politicians) crafting the legislation you’ve got to be granular and take your time.”

Mr Lock said smaller banks were seeing higher overall compliance costs, including an increase in cost recovery levies that are paid to the banking regulator and a rise in insurance premiums including for directors and officer’s policies.

The regulatory impost is exacerbated by a challenging environment for lenders as interest rates stay lower for longer and banks manage increased margin pressure.

“The pressures on operating costs are going to get greater,” Mr Lock added.

The 144-year-old bank is also among lenders that welcome a potential competition inquiry in the sector.

“There is enough competition it is just not unleashed,” he said. “There is a backlash against the (major) banks (post the royal commission) but there is this inertia of people that won’t switch.”

The Customer Owned Banking Association last week applauded the Australian Competition & Consumer Commission’s proposed inquiry into the sector’s competitiveness.

Mr Lock was in Canberra earlier this month as part of a COBA delegation to stress the importance of competition and proportionate regulation.

He believes the growing amounts of regulation and related costs will spur more consolidation among smaller banks, which could be detrimental to competition.

Executive accountability, remuneration and responsible lending are among areas of intense focus following the royal commission’s recommendations.

Mr Lock’s comments came as Heritage reported growth in loans and deposits, but a dip in net profit for the 12 months ended June 30.

The bank’s net profit fell 3.9 per cent to $43.3 million for the year, as expenses inched up and fee income fell. That came after a record result in the prior 12 months.

“I see next year as being quite a challenging year... there is a cautiousness out there and a lack of confidence,” Mr Lock said of the outlook, noting expectations for further rate cuts and that the economy’s growth was likely to be flatter than expectations.

Heritage’s net loans and receivables climbed to almost $8.5 billion in the year ended June 30, from about $8.1bn a year earlier. Retail deposits grew 5.5 per cent to $6.9bn, and deposit customers account for about two-thirds of the bank’s members.

Heritage’s net interest margin printed at 1.89 per cent as at June 30, down from 1.94 per cent a year earlier. Total assets grew 5.9 per cent to $10.1bn.

Mr Lock said loan arrears had edged up slightly in the year ended June 30, but there was no “cause for alarm”. Heritage’s total allowance for credit losses rose to about $9 million.

Heritage is in the process of opening two branches in Western Sydney and has plans to open as many as 10, as it sees physical branches as an important part of its overall strategy.