Westpac’s woes show the pressure banks are under

Scale used to be an advantage in financial services, but big four executives are now talking about zombie banks.

Scale used to be an advantage in financial services — deep market liquidity, profitable and extensive branch networks, and higher credit ratings leading to lower funding costs.

In their darker moments, though, executives at the big four lenders are now just as likely to bend your ear about zombie banks so hogtied by regulation that they’ll cease to fulfil their economic purpose.

It’s a warning rather than a prediction, although the doomsayers found their voice last week with the collapse in Westpac’s net interest margin in the June quarter.

The commercially rational thing to do would be to follow the lead of smaller rivals — restore the margin by hiking lending rates.

Instead, the big four are paralysed by an overwhelmingly hostile political environment, fanned by the financial services royal commission and a bunch of heavily committed regulators, including the competition watchdog (ACCC), the market conduct regulator (ASIC) and the Productivity Commission.

It’s an uncomfortable squeeze and there’s no short-term respite.

The decline in Westpac’s interest margin from 2.17 per cent in the first half to 2.06 per cent in the June quarter was the bank’s largest quarterly fall since the early 1990s.

Higher funding costs (5 basis points) was the biggest contributor to the 11 basis point contraction, followed by a poor treasury outcome (4 basis points) and other factors such as less higher-margin lending to interest-only borrowers.

Retail banking has clearly lost its post-crisis lustre, with the challenge compounded by business banking’s persistent failure to pick up the slack.

For Westpac, the margin pressure has been more pronounced than Commonwealth Bank in its recent annual result, and the quarterly update from National Australia Bank.

CBA reported a 2 basis point margin contraction in the second half of its June financial year, while NAB’s update for the June quarter showed a “slight” margin decline.

Westpac has suffered more than its peers because of its higher loan growth.

While the temptation in tight credit conditions is to keep the volume flowing, it comes at a cost to the margin when funding gets expensive.

Short-term wholesale funding costs have spiked since February, with Westpac previously revealing that the margin is compressed by 1 basis point for every 5 basis point movement in the bank bill swap rate.

On average, the BBSW was 25 basis points higher in the June quarter than in the first half of the 2018 financial year.

All bets are off at NAB

Antony Cahill’s surprise resignation as chief operating officer at National Australia Bank has thrown the race to succeed Andrew Thorburn wide open.

Cahill, who was the first among equals in the internal succession race, is returning to London with his family to take up the role of managing director, European regions, at the global payments company Visa.

His departure creates a more even contest between a small group of contenders, including the head of business and private banking Anthony Healy, who shares the pedigree of Thorburn and his predecessor Cameron Clyne as chief executive of Bank of New Zealand.

Among the others are corporate and institutional banking boss and former NSW premier Mike Baird, and the head of the personal bank Andrew Hagger.

Hagger, of course, has had a bruising encounter with the financial services royal commission in its consumer and superannuation hearings.

BNZ boss Angela Mentis, who swapped jobs with Healy in January, is seen as an outside chance.

Cahill’s last day with NAB will be September 14, before starting with Visa in January next year.

In the meantime, Rachel Slade will take up the role of acting group executive customer products and services, effective immediately. She was previously executive general manager deposits and transaction services.

Word on the street

The extent of National Australia Bank’s exposure to scalp-seeking financial regulators should be clearer by the close of business on Friday, when the bank is due to respond to closing submissions in the superannuation hearings of the financial services royal commission. NAB’s reputation has taken a monumental beating. Of that there’s no doubt.

However, the word on the street is that the bank — at the very least — will strongly contest assertions made by senior counsel assisting Michael Hodge that wealth boss Andrew Hagger showed “a disrespect for the role of the regulator and a disregard for the gravity of the events”.

NAB, according to Hodge, was not full and frank on members’ likely losses from wrongly imposed plan service fees, or the expected amount of remediation.

Instead, in a bid to minimise reputational damage, the bank was silent when ASIC asked if the figures in the breach report were accurate.

Hodge took a dim view of Hagger’s evidence that he “left the door open” for the regulator to ask the question.

As you’d expect given chief executive Andrew Thorburn’s intervention, NAB’s legal advice is solid on the issue of the bombshell question asked by commissioner Ken Hayne of Nicole Smith, the former chair of the bank’s superannuation trustee NULIS.

Addressing the continuing fees-for-no-service scandal, Hayne asked: “Did you think yourself that taking money to which there was no entitlement raised a question for criminal law?” Ms Smith replied that she did not. The exchange caused a meltdown at NAB.

Thorburn bombarded social and traditional media platforms, hosing down the idea of uniformed cops picking up the scent of fraud or theft and storming NAB’s headquarters in Docklands to execute search warrants. In that narrow sense, he was right.

Nowhere in his 222-page closing submission did Hodge argue the case for old-school theft — the focus, instead, was on Corporations Act-style misconduct, which can be criminal as well.

That means breaches of directors’ duties, such as falling short of the duty to provide financial services efficiently, honestly and fairly, or deducting plan service fees when there was no adviser linked to the member’s account.

It comes down to the age-old distinction between blue and white-collar crime, where the end result might be the same but the means are seen to be different.

This should be no solace to NAB, but in the current circumstances the smallest of victories tend to loom large.

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