Westpac’s Brian Hartzer picks a strange time to launch a defence

The unknown unknowns are what should worry investors heading into next week’s release of the banking royal commission report.

Westpac CEO Brian Hartzer. Illustration: Eric Lobbecke.

The unknown unknowns are what should worry investors heading into next week’s release of the royal commission report into the financial services industry.

In this context, Westpac chief Brian Hartzer’s entry into the debate yesterday raised eyebrows given his defence of the banks and warnings about unnecessary regulation.

There was not much wrong with the content, just the timing, particularly as the commission had focused on some rather sloppy loan approvals from the banks.

Some would argue the banks created the housing bubble through their so-called liar loans and other encouragement to borrowers as Sydney house prices rocketed up some 75 per cent earlier this decade.

Other banks expressed some surprise that Hartzer didn’t note the obvious caution on the front line of the bank loan divisions, where staff are understandably 150 per cent cautious in the wake of the commission hearings and coming APRA crackdowns.

The feedback from fund managers is surprisingly blase ahead of the report, arguing the bad news is already out so what else are we going to learn.

Putting the big banks to one side, the reality is the basic industry models of the likes of AMP and IOOF are under potential threat from the commission findings.

This alone should put investors on notice.

There is concern at the way the Government is handling the release, which should have been both immediate and open for all concerned rather than a tightly managed process via government-run media lock-ups.

The industry is already a political football and Josh Frydenberg clearly wants to manage the commission’s release.

There may well be criminal actions against senior bank staff and this is of obvious concern, and to senior bankers a key fear is what the commission will do about banker pay levels.

Major overhauls is one way the commission can influence future behaviour so bankers can expect it harder to earn the big bucks.

For a lawyer, commissioner Kenneth Hayne spent a lot of time talking about the lack of competition in the industry, so that suggests structural changes.

Obviously, the real impact will be seen in how the banks react — will it be relief that it’s over and now let’s get back to the ball park, or will it be fundamental changes?

This should come in many forms, including banks actually taking responsibility for their snafus and shifting the dial to focus on customers for a sustainable future.

Slattery joins AMP

Former self-managed super fund boss Andrea Slattery has traded up from the board of financial advisory and services concern Centrepoint to join the board of AMP.

She is part of the new guard at the beleaguered financial services group under chair David Murray, and will be the only female on the board after mass resignations last year in the wake of Catherine Brenner’s departure.

Brenner left at the centre of a slew of negative days at the royal commission where AMP was found to have misled the regulator and charged clients for no service.

Some would say its very existence is in question and maybe Monday’s royal commission release will provide some clues.

All of which is a hefty backdrop to the Slattery appointment which, given her background, can only be seen as a positive.

In her 14 years as the SMSF ­Association founding chief from 2003, funds under management in the sector increased more than seven-fold. It was also at the centre of myriad government policy changes in which she helped protect the industry’s position.

She is well respected in Canberra and this and her grassroots knowledge of the industry is what impressed Murray, who met her during the course of his financial systems inquiry.

AMP is an advice-based funds manager at a time when the financial planning model is under pressure and self-managed funds are run by people wanting to take care of their own retirement planning.

Milk prices on rise

A combination of the drought and consequent higher feedstock and water prices is making life tough in the dairy industry, and the processors are increasing prices in an attempt to boost supply.

Market leader Saputo, which processes about 2.3 billion of the forecast 8.6 billion litres of milk, yesterday increased prices from $5.95 per kilogram of milk solids to $6.05.

This is the first time farm-gate prices in Victoria have risen above $6 a kilo for four years, and comes three years after former Murray Goulburn boss Gary Helou infamously tipped $6 prices as the global industry watched prices plummet.

Bega this week increased its price to $5.99 a kilo and No 2 player Fonterra is sitting on $5.98.

The farmer is obviously suffering from all ends, so to try to maintain supply the processors are lifting prices.

Australian milk volumes are tipped to fall from 9.2 billion litres last year to 8.6 billion this year.

US rates relief

Financial markets welcomed US Fed chief Jerome Powell’s more dovish statements yesterday but Scott Morrison won’t because it simply added to the growing caution about the global and local economies.

While US markets rallied yesterday, the local market was mixed.

NAB economist Alan Oster thinks the RBA should cut its GDP forecast from 3.25 per cent to 2.75 per cent next week when it unveils its rates decision.

Governor Philip Lowe is also addressing the National Press Club, which will be a further opportunity to explain whether he agrees with the market that the local economy is stalling.

The issue, according to Oster, is that consumers have stopped spending because they haven’t received a wage rise in recent memory, and what money they do have is being spent on utility bills and debt payments.

Powell said the US economy was fine, it’s just he used the word “solid” instead of “further gradual increases”, as he has used in the past. Just six weeks ago the Fed lifted rates to 2.5 per cent and the talk was of at least two rate rises this year, but heading into yesterday’s meeting Wall Street had been expecting the Fed to stay on hold. It did, and stocks and bonds rallied in relief.

Equity investors don’t like rising interest rates.

Powell also flagged more flexibility around the selldown in the $US4 trillion ($5.5 trillion) in bonds on the Fed’s books from the post-GFC monetary stimulus.

The selldown was another brake on the economy, so more flexibility means the Fed doesn’t want to put more pressure on a more fragile economy.

All good from an investor view point, but if you are heading into a federal election where you are spruiking economic management, a booming economy would be better news.

This isn’t happening, and Oster thinks the RBA will be on hold for a long time yet and, contrary to some recent statements, its next move may still be down.