The Final Report of the Financial Services Royal Commission (FSRC) has been released. Its recommendations are broadly in line with our expectations, and given that the banks’ actions have already moved in line with those recommendations and bank share prices have derated, we think bank prices could actually move higher given the extremely stretched valuations of non-bank industrials and the apparent return of QE-ternity.
Bank bashing by electioneering politicians will rise: The FSRC presents the Opposition Labor Party with an opportunity in the run up to the Federal election before 19 May 2019. That’s not good for banks given Labor’s “bank unfriendly” policies with regards to dividend-franking reforms and negative gearing on residential property.
Increased public funding for banking regulators
Industry body code of practice gets legislative bite by way of “enforceable code provisions”; ASIC/APRA increased funding; ASIC becomes conduct regulator, but no changes to mortgage responsible lending which is not extended to small business. An unnamed 24 persons/entities have been referred to ASIC for having broken the law.
Potential manageable financial penalties for legal breaches and remediation expenses
A recent increase in penalties won’t be applied retrospectively; Fee for service has largely been provisioned (total bill will be around A$1bn for the industry – that’s not material in terms of earnings or capital). Credit availability remains more disciplined for housing, credit cards auto and agriculture. Interest only and high LVR loans are already harder to get which slows credit growth/tempers house prices. APRA has removed interest only loans and investor lending caps, but flagged that a counter cyclical counter buffer could be imposed if higher risk housing lending resurges.
Conflicted commission structures will be removed
There will be a shift towards much reduced “fees for service”. In particular, mortgage broker commissions will be restructured by prohibiting trail commissions on new loans from July 2020/banning volume-based commissions and in three years review moving to a borrower pays structure. This is good for the banks.
The FSRC and the looming Federal Election are likely to diminish the banks’ pricing power to lift benchmark back-book housing loan rates to preserve high ROEs. Australian banks enjoy a public subsidy by way of the cheaply priced committed liquidity facility and the zero-cost financial-claims scheme so there must be a risk in that the Federal 6bp bank levy is increased at some point with mechanisms to ensure it cannot be passed onto borrowers.