• 24/07/2024

How banks made their case on credit, culture in Hong Kong

Chanticleer| Australian Financial Review| 28 March 2019


Hong Kong | There’s nothing like a trip overseas to remind you of Australia’s place on the world stage.

But at the Credit Suisse Asian Investment Conference in Hong Kong this week there is one aspect of Australian business life that drew a good deal of fascination – even if that fascination was just slightly morbid.

The hot topic, of course, was banking. The chief executives of three of the big four banks held meetings with investors across the week – ANZ’s Shayne Elliott flew in briefly earlier in the week, Commonwealth Bank’s Matt Comyn was on deck, and both Westpac chief executive Brian Hartzer and chief financial officer Peter King were in attendance – with acting NAB chief executive Phil Chronican sending the bank’s experienced head of corporate and institutional banking, David Gall.

The banks’ annual pilgrimage to the Credit Suisse event always sees them set a ferocious pace with investor meetings, but the interest was naturally sky-high this year.

And it wasn’t just bank executives that investors were keen to quiz. Credit Suisse Australian boss John Knox and local banking analyst Jarrod Martin were also busy fielding questions.

From Chanticleer’s discussions with those on both sides of the meetings, investors are not necessarily ready to buy bank shares, nor take short positions. Rather, they wanted mainly to find out what the heck had gone on after a dramatic 12 months.

The first major issues bankers were quizzed on was the credit squeeze and property market, which is no surprise given the potential for tighter lending conditions to flow straight through to bank profitability.

The message from the bank executives was clear: housing isn’t a disaster area, and we are certainly open for business.

While there is no doubt that macro-prudential measures introduced three or four years ago have flowed through the industry – and trimmed 10 per cent to 15 per cent off the maximum a borrower can access, although few go to their upper limit – the bigger change is through credit practices.

Income and expense checks required are much more onerous. This might have pushed out loan approval times, but the Australian bank executives stressed that loan approval rates haven’t changed, and loan amounts haven’t shifted – if anything, they have ticked up.

The message here is that the pendulum has probably swung back too far, but this over-correction will work its way through the system. No bank will be cutting back on prudent lending.

So while the big four are growing the mortgage and business loan books at different rates and in different ways, there was a determination to emphasise that growth is still a priority.

As one executive said of the questions on the credit squeeze: “I always ask these investors; how do you think we actually make money?”

Investors were also keen to address the potential for loan arrears to rise. Bankers were quick to remind them that while 90-day arrears would likely tick higher from their current, very low levels, credit standards have been strong throughout the cycle and rose in conjunction with prices over the past five years.

Investors’ royal commission concerns were two-fold. First, is the cost impost flowing from the commission behind the banks now?

Second, what lingering effects will the commission’s recommendations have on the sector?

The broad answer from the banks is that the sector is a long way through the remediation process, and what’s on the table now represents the damage they know about.

Investors are keen to know how challenging things are for the banks. David Rowe

Reviews of aligned financial advisers – those financial planners who worked for themselves but under the banks’ umbrellas – is an area of potential further pain, but the message was the ongoing compliance and risk costs could largely be offset in the course of normal operations.

The question about the broader environment is tougher to answer.
Some executives have expressed concern about the higher regulatory burden that will be placed on the banks, and that the broad vilification of the sector will have a psychological effect on bank staff, who will be afraid to make a mistake.

One view is that there’s even a chance that a climate of fear could be counter productive, stifling moves to reshape cultures such that mistakes are quickly admitted and addressed.

The message on the regulatory environment is certainly going to be tougher, and executives are sympathetic to the pressure that regulators are under – a feeling no doubt borne of the pressure the bank executives are feeling.

But just as the pendulum of responsible lending has swung back one way, there was a hope that the regulatory environment can eventually find a happy medium – where a regulator that is recognised as unquestionably tough is still able to work collaboratively with the sector to maintain and reform the sector.

A final issue raised by investors was the push by the Reserve Bank of New Zealand to greatly lift capital requirements for the big four, who dominate Kiwi banking.

The message from the industry is there is a lot of water to go under the bridge here, and no one should assume capital raisings are an automatic outcome.

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