Banking Royal Commission – Round 1
Why a banking royal commission?
A royal commission to investigate the misconduct in the Banking, Superannuation and Financial Services Industry commenced on March 13, led by former High Court judge Kenneth Hayne.
The royal commission will investigate suspect financial advisory, dubious consumer credit approvals, misuse of retirement savings, and other actions that “fall below community standards and expectations”.
An interim report is expected to be submitted no later than September 30, 2018, with a final report due by February 1, 2019.
What was alleged / discovered in round one?
After the first round of the Australian Banking Royal Commission, participants heard evidence alleging fraud, bribery, falsification of documentation, failure to verify client income, failure of banking internal controls and failure by the banks to report misconduct to ASIC.
While some evidence may suggest these cases were isolated incidences, there were also concerning evidence that pointed to systemic problems (for instance the ANZ commissioning KPMG report which reviewed 418 mortgage applications and found that 33% had errors and 16% had incomplete or incorrect borrower financial details).
Royal Commission impacts on bank shares
With much media, regulatory and government pressure, before the conclusion of the royal commission the big four Australian Banks might experience:
Tighten lending/underwriting standards (even at the expense of loan growth).
Attempt and move towards improving their methods and processes (including internal controls) of origination and verification. In our view, this will result in slightly higher cost to income ratios for banks (and indeed we would not be surprised if management teams begin using the royal commission as a reason to change guidance).
Lower return on equity for banks (but more investor confidence and expectation of stable and low non-performing loan levels as a percentage of total loans to continue) as loan growth weakens, loan sizes decrease and banks become more vigilant in rationing credit.
Potential moderation in house prices as a result of tighter lending.
Banks may reconsider their loan exposures. Indeed, we have already seen Commonwealth Bank of Australia (CBA) suspend credit card and personal loan insurance and Australia & New Zealand Banking Group (ANZ) cease underwriting consumer loans for cars, boats and caravans. Further, another case revealed that the National Australia Bank (NAB) ‘Introducer Program’ encouraged an incentive scheme that wrongly motivated accountants and solicitors to recommend consumers towards NAB home loan products. The commission was informed that some introducers issued customers with false pay slips to ensure loan compliance, while others were reported to have paid cash bribes to brokers to help overlook faulty and unworthy loan applications.
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