Bankers rely on Canadian comparisons for high returns

Competition, or lack of it, has been one of the key themes in this week’s parliamentary probe into the nation’s banks.

Returns on equity

Competition, or lack of it, has been one of the key themes in this week’s parliamentary probe into the nation’s banks.

Representatives of both major parties have zeroed in on the industry’s generous return on equity by global standards, with Labor Party MP Pat Conroy hammering the line yesterday that high ROEs are a cost borne by the rest of the economy. ANZ Bank chief executive Shayne Elliott came armed with charts — lots of them.

And it was no surprise that Canada featured strongly.

Sensitive about the big gap between their ROEs and those in similar developed countries, the major banks have long pointed to Canada as the most appropriate benchmark. Both countries are resources-rich, the banking systems are similarly structured, and the economies rank 14th and 15th in terms of GDP per capita.

Better still for our banks, which have been browbeaten by Canberra and are desperately in search of allies, the ROEs have moved in tandem over the last decade.

The 10-year, average ROE for the big four is 16.5 per cent — almost in line with the 16.8 per cent figure for Canada’s main lenders.

For Conroy yesterday, this was only of superficial interest. He wanted Elliott to agree with him that a company’s ROE should be slightly above its cost of capital in a competitive market.

The ANZ boss agreed in principle, but emphasised that the returns earned by leading banks in developed markets were “about the same” as in Australia, once adjustments were made for the fines they had paid in recent years.

Industry returns in Europe were, indeed, a lot lower.

In Britain, for example, the one-year ROE for comparable banks was 0.1 per cent, rising to 1.8 per cent over five years and 5.4 per cent over a decade.

However, this was due to the near-failure of the continent’s banks in the crisis, which led to a €483 billion recapitalisation bill.

The problem is that ROEs in Australia are already falling due to regulatory reforms, weak credit growth and a turn for the worse in bad and doubtful debts.

In the half-year to March, ANZ’s ROE was 12.3 per cent, down from 14.5 per cent a year ago.

How much lower does Labor want this to go?

And are they prepared to compromise the banks’ ability to fund the economy?

Frank admissions

The big problem with the banks debate in this country is that it’s mostly framed around “scandals”.

As expected, Labor Party members of the House Economics Committee hunted Commonwealth Bank boss Ian Narev on Tuesday, enlisting financial ­planning and CommInsure victims in a fruitless search for a “gotcha” moment to back Bill Shorten’s repeated call for a royal commission.

A valuable lesson was learned, because yesterday’s grilling of ANZ bosses Shayne Elliott and Graham Hodges was much sharper, with more emphasis on solutions than past misbehaviour.

It’s often the simple and direct questions that produce the most illuminating answers.

When the National Party’s Kevin Hogan asked Elliott why he thought he was in the room, the ANZ chief’s answer was brutally honest.

“As an industry we lost touch with our customers; we became too internally focused,” he said.

To be fair, Liberal Party MP and committee chair David Coleman tried to set the right course on Monday.

He probed Narev about measures to stiffen competition, including adoption of portable bank accounts, the introduction of rate-tracker mortgages that move in line with benchmark interest rates, and a regulatory “sandbox” proposal administered by the prudential regulator to lower barriers to entry.

Narev supported the principle of greater competition, with Elliott even more forthcoming yesterday when Coleman repeated his line of questioning.

The ANZ chief said there was a place for rate-tracker mortgages, even though they weren’t currently on the market.

The problem, he said, was the premium pricing that the product would attract.

If the interest rate were pegged entirely to the benchmark rate, it would introduce a funding risk for the bank because ANZ relied on a mix of funding sources, some of which were not linked to official rates.

Elliott said he wasn’t opposed at all to account portability or open data, but stressed that data security was paramount.

He also said a bank-funded tribunal dedicated to resolving customer issues was a good idea. One of the bigger surprises from the inquisition was Elliott’s candid admission that ANZ could work harder to cut credit card fees and interest rates.

Cards only account for 5 per cent of the bank’s $900bn in assets and the same percentage of its $7.5bn in annual profit.

However, the rate of return was very attractive.

Liberal Party MP Scott Buchholz could hardly believe his ears when ANZ chief executive Elliott agreed with the proposition that the banks had “ample capacity” to lower credit card rates.

The ANZ chief went further, saying steep headline rates were probably doing the industry more harm than good.

The introduction of risk-based pricing, where improved technology could identify people with superior credit profiles and offer them cheaper rates, was one way to achieve this.

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