Analysts and fund managers are tipping more pain to come for Australia’s big banks, pointing to rising compensation costs and sliding share prices following the Hayne royal commission’s hotly anticipated interim report.
UBS analysts predict Westpac Banking Corp, the only member of the big four still committed to its wealth management arm, will be forced to increase its provisions to compensate customers affected by inadequate financial advice the bank’s aligned financial planner force delivered.
On Thursday, Westpac told the market its full-year earnings would take a $235 million hit due to refunds to customers affected by so-called fees-for-no-service at the hands of its salaried planners and for provisions for litigation relating to a Federal Court finding that it engaged in “unconscionable conduct” in attempting to manipulate the bank bill swap rate (BBSW). On August 7, ASIC stated that Westpac had made $6.7 million in refunds so far.
UBS analyst Jonathan Mott said it was “highly likely” there would be more provisions. He pointed out the provisions announced on Thursday included only costs related to salaried planners.
“It does not include [provisions related to] the investigation into advice fees and inadequate financial advice by aligned planners, which are expected to be taken in FY19,” Mott said in an investor note. “It is too early to quantify how large the additional FY19 charges could be.”
The news came as fund managers flagged increasing pressure on bank stocks from Commissioner Kenneth Hayne’s much-anticipated interim report, which addressed a range of misconduct from the big retail institutions and questioned what could be done to prevent it from happening again.
“What we’re talking about is a very significant societal risk, and licence to operate,” Magellan deputy chief investment officer Dom Giuliano said. “That’s a real business risk, and you’d be silly not to be thinking about it.”
Magellan, primarily known as a global manager, does not hold Australian bank stocks but does hold positions in large global banks, which were affected by the fallout from the GFC.
Rough year for banks and AMP
“The banks have certainly been impacted at a stock-specific level by societal issues,” Giuliano says. “The returns that global banks could expect to earn fundamentally shifted after the GFC. There was a regulatory backlash against the banking business model and you saw a number of percentages of sustainable return actually taken out of those banks. We’ve been in and out of banks with eyes wide open to risks.”
It’s been a year most executives (and shareholders) of Australia’s largest financial institutions would like to forget, with share prices of the listed entities diving spectacularly, compared with the broader market. The share prices of the big four banks and AMP are down 15.1 per cent, on average, for the 12 months to date, this compares with the 9.34 per cent rise of the broader ASX 200.
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AMP’s share price was the hardest hit over the last year, down 24.4 per cent, mainly due to scandals stemming from the revelations during the second round of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The inquiry ultimately led to the company’s chair and chief executive leaving. Westpac was the hardest hit of the big four, down 14.9 per cent, followed by National Australia Bank, down 13.2 per cent, ANZ Bank (-6.6 per cent) and Commonwealth Bank (-6.3 per cent).
Former prime minister Malcolm Turnbull announced the royal commission into the banking sector would kick off on November 29 last year, after sustained pressure from within his own government.
SG Hiscock & Co portfolio manager Hamish Tadgell predicted this week that findings from the Hayne inquiry would spark increased competition from smaller banks like industry-fund owned ME.
“The royal commission doesn’t actually have a mandate to introduce more competition, but my view is that it will be a consequence of the recommendations,” Tadgell said.
Whether big banks will remain an attractive home for financial planners has also been called into question as Commonwealth Bank and ANZ have offloaded elements of their wealth management operations. Also, a UBS report this week revealed that the major financial institutions experienced their first quarter of retail net outflows in more than six years.
Retail net flows in diversified financials stocks for the June 2018 quarter totaled $3.3 billion, with specialty platform providers such as Netwealth, HUB24 and Praemium accounting for 78 per cent of this, or $2.6 billion.
“Conversely, major financial institutions experienced their first quarter of net outflow (-$570 million) since March 2012, driven by outflows across all the major players, bar CBA and Macquarie,” UBS analyst Kieren Chidgey said in a note.
Planner movement
Planners are taking note. Adviser numbers for these players are down 9.3 per cent over the year to August 2018.
“Aligned advisers now account for only 34 per cent of the industry,” Chidgey said. “AMP, with the largest market share of advisers at 10 per cent, experienced a loss of 8.2 per cent, or 234 advisers, over the year.”
Beleaguered wealth management giant AMP has set aside a $290 million-plus contingency for reparations to its clients who have been affected by bad financial advice.
“We’re facing squarely into the issues that have impacted our reputation and the community’s confidence in AMP,” then-acting chief executive Mike said in July. “We know it will take time to earn back trust; however, today is an important milestone in that process.”
At the same time, AMP said investors should expect a smaller dividend and forecasted its interim payout would fall below its normal payout rate of 70 to 90 per cent of profits.
