Analysis: Are the big four’s ‘easy days’ really behind them?

At the beginning of August the RBA passed down its historic rate cut decision, reducing the official cash rate to a record low 1.5 per cent. The non-majors led the way by passing the cut onto their customers; Bank of Sydney and Bank Australia were the first to slash their variable rates by the full 25 basis points. The big four quickly came under fire for not following suit.

The rate cuts

The major banks’ rate cuts — which range from 10 basis points (NAB) to 14 basis points (Westpac) – were met with criticism across the banking sector, by mortgage brokers and industry leaders alike.

Peter White of the Finance Brokers Association of Australia (FBAA) said it was “bitterly disappointing” that the big four failed to pass on in full the 25 basis point cut.

“Banks must protect shareholders but they must look after their customers,” he said.

He went on to question CBA’s decision to start the new rate from August 19 — three weeks after the RBA’s cut.

“When rates rise the lenders lift their variable rates immediately! Again it is the customer who is being treated poorly.”

Royal commission

In early April, opposition leader Bill Shorten called for a royal commission into the major banks, and in a doorstop interview in Melbourne last week, he reaffirmed his position: “We're not going to give up on a banking Royal Commission, we're not going to give up our opposition to a $50 billion tax cut for large multinationals,” he said, “Mr Turnbull's policies are out of touch.”

The FBAA came out in support of the Labor party’s intentions, revealing that it wants banks to start “practicing what they preach”.

The FBAA’s Peter White says it isn’t enough for the banks to explain their actions only once a year, and dismissed a move by leading executives who have taken an oath to lift ethical standards in the industry.

“How ironic for bankers to sign an oath promising to lift values and ethics when the spotlight is now on them for filling their pockets and failing to pass on the full interest rate cuts,” Mr White said.

The Australian Bankers’ Association has since labelled the proposed royal commission as “purely political”.

ABA chief executive Steven Münchenberg said: “Labor has made all sorts of claims for a royal commission but clearly the real reason is just to attack the government.”

“In the meantime, banks will get on with implementing comprehensive new measures to protect customer interests, increase transparency and accountability and build trust and confidence in banks,” he said.

Moody’s revised outlook

Although Australia’s AAA sovereign credit rating was recently affirmed by Moody’s, the ratings agency last week followed S&P in placing the big four on a negative outlook.

The decision came after three of the big four banks posted a fall in profits and all reported increasingly difficult lending conditions.

ANZ explained in a 19 August trading update that Moody’s expects “a more challenging operating environment for the banks for the remainder of 2016 and beyond”.

On the same day Westpac highlighted that Moody’s observations that the challenging environment could lead to deterioration in the majors’ profit growth and asset quality, as well as an increase in their sensitivity to external shocks.

Meanwhile, Commonwealth Bank’s chief financial officer David Craig said Moody’s announcement “…reminds us that at time of global economic volatility, Australia’s world banks are under intense scrutiny from ratings agencies and global funding providers.”

NAB added that the ratings outlooks are assigned only to banks’ long-term deposit, issuer and senior unsecured debt ratings: “NAB’s short-term, hybrid and subordinated debt ratings remain unchanged.”

A more difficult lending environment

Speaking to Mortgage Business, AMP chief economist Shane Oliver added that the likely reason for Moody’s decision to place the big four on a negative outlook is a concern regarding the banks’ increase in non-performing loans, higher funding costs, and slowing growth in lending and earnings.

“The back-drop has gone from being a very positive one for the banks which dominated over the last few years, to one which is more uncertain,” Mr Oliver commented.

“Since the GFC, the environment has generally been on the mend with low and falling non-performing loans, falling cost of capital and good credit growth in the last five years, but all of those things are now turning around to become less favourable,” he explained.

“The easy days seem to be behind [the banks]; they’re transitioning into a more difficult environment,” he added.