Business As Usual For The Big Four?

2018 marks a big year for Australia’s big four banks. The recently launched Royal Commission into the banking industry is set to put banks, and how they operate, under the microscope.

Of the four banks, the Commonwealth Bank of Australia (CBA) has taken the most heat for alleged breaches of money-laundering regulations.

Angry shareholders also launched a class action against the bank, claiming CBA failed to inform shareholders of the breaches, though they had known about them for two years.

The National Australia Bank (NAB) has also been in the news lately, announcing in November 2017 that the firm would cut 6000 jobs. That same day, NAB announced that they netted a $5.3 billion annual net profit.

CBA, NAB and Westpac have also come under fire for their failure to introduce Apple’s digital wallet system.

The system allows users to use their smartphone to make contactless purchases, in the same way that a credit or debit card allows.

What about ANZ?

ANZ already uses the Android version of the app: Samsung Pay. The Google Pay version works with all Android devices, integrating with the bank’s own digital wallets, such as NAB Pay or CBA’s Tap and Pay.

Part of the problem with introducing the iPhone Apple Pay app is that Apple will not allow the banks to use their own digital wallet apps for the iOS operating system. For the meantime, the banks are refusing to play ball with Apple, meaning that the digital wallet is useless for iPhone users who bank with NAB, CBA or Westpac.

ANZ, along with Westpac, have also copped flak over failing to properly disclose fees and interest rates associated with their credit cards to consumers.

After scrutiny from corporate watchdog ASIC earlier this month, ANZ will reportedly refund $10.2 million to over 52,000 credit card accounts.

Westpac have also forked out $11.3 million to 3,400 customers after a review of credit limit increases to customers who went on to experience financial difficulty. The amount included $3 million in fee refunds and $8.3 million in waived credit card balances.

Both banks said that they were reviewing their lending procedures after the costly refunds.

ANZ also announced today that it would be putting interest-only loans under more scrutiny. The move was a part of the bank’s policy to be more cautious with riskier mortgages. A bank spokesperson said:

ANZ regularly reviews practices to make sure our lending standards are in line with community expectations and our own risk appetite … We want our customers to pay down their loans as fast as they reasonably can’.

But how are these issues affecting the big four bank’s bottom line?

CBA’s share price drops 

At the time of writing, CBA’s share price was down 0.48% $76.39. The money-laundering scandal and other regulatory issues have ended CBA’s run of record profits.

CBA’s cash profit dropped to $4.87 billion for the first-half financial year, ending the firm’s streak of nine record first-half profits.

The profit result took into consideration $575 million CBA has set aside to cover potential fines for alleged breaches and customer compensation. Without this provision, along with adjustments for discontinued operations, the profit figure would be $5.1 billion.

The money-laundering saga is CBA’s biggest ongoing issue, with reports that the bank breached anti-money laundering rules more than 50,000 times.

The Australian Prudential Regulation Authority (APRA), which is currently investigating the issue, released an update on their review of CBA at the beginning of the month, stating that:

The panel is focused on identifying the key organisational and behavioural factors, or combination of factors, that can explain the public ‘fall from grace’ of an otherwise iconic and financially very successful Australian financial institution’.

For its part, CBA said they were cooperating fully with the APRA inquiry. CBA chairman Catherine Livingstone said:

We’ve acknowledged there are aspects of our culture where we could improve and we have been focussed on upgrading our performance in the areas of governance, operating procedures and regulatory compliance’.

The recent financial report is the last for outgoing Chief Executive Officer Ian Narev. The head of Commonwealth’s retail banking division, Matt Comyn will take over Narev’s position in April.

CBA’s retail banking division was the firm’s standout performer, up 8% from the prior year, and accounting for more than half of the group’s total earnings with a net profit after tax of $2.65 billion.

What’s happening with NAB?

NAB shares are also down slightly at the time of writing, dropping 0.76% to $30.18. NAB aren’t due to release their half-year results until 3 May, so let’s focus on their first quarter trading update.

NAB’s projected statutory net profit was $1.65 billion, up 3% from the same period last year. Cash earnings were down 1%, while revenue was up 1%. Expenses were up 4% due to increased business investment, but NAB are still targeting cost savings of more than $1 billion by the end of the 2020 financial year.

How much of these savings will come from staff cuts is unclear. While NAB is shedding 6000 staff, they also plan to hire 2000 more in the push towards automation. Retrenchments begin this week, with many of the cuts coming from Melbourne’s head office.

These cuts amount to one in five of NAB’s overall workforce. NAB attributes the cuts to a wider trend in automation of the whole information industry, encompassing financial institutions, accounting and law firms and journalism.

NAB chief executive officer Andrew Thorburn described the situation as:

‘…one of the big issues in Australia for the next five to 10 years: the new nature of work [is] more casual’.

Meanwhile, Westpac has also dropped 1.22% today to $30.77 at time of writing. The firm’s 2017 annual report showed a profit of $7.99 billion, up 7% on the previous year. Cash earnings were also up 8% to $8 billion.

The newly introduced Bank Levy took a $95 million chunk out of revenue, and resulted in a $66 million reduction in cash earnings. Westpac’s interim results will be released on 7 May.

ANZ continued the downward trend falling 0.14% to 29.05 at time of writing. ANZ’s statutory profit for the 2017 financial year was $6.4 billion, up 12% on 2016. The firm’s cash profit rose 18% over last year to $6.93 billion. ANZ will release its half year results on 1 May.

ASIC goes for CBA

ASIC fired the first shots in the Royal Commission into the banking industry earlier this week, with CBA in its sights. ASIC alleged that CBA attempted to rig the bank bill swap rate on six occasions.

The preliminary hearing also stated that the first topic for the Royal Commission’s first round of hearings next month would be residential mortgages.

The commission intends to look into case studies involving National Australia Bank, CBA-controlled Aussie Home Loans and the CBA.

Whether or not the commission can cover all of the banks alleged wrongdoings over just one year is debatable. But the impact of what the commission does uncover could be huge.

The big four banks make up over a third of the Australian share market and boast a huge following of shareholders. Home loans also tie many everyday Australians to the big four.

One way or another, 2018 will be a big year for the big four and everyone invested in them.

If the banks do go down, will the economy go with them? Vern Gowdie thinks that Australia is long overdue for a recession. Read Vern’s free report: ‘The Aussie Recession Survival Guide’ now.