Analysts Raise Royal Commission Damage Bill

By Glenn Dyer | More Articles by Glenn Dyer

Another gloomy forecast about the financial impact on the big banks from the Hayne royal commission but the market shrugged it off by the end of trading yesterday.

Banking analysts at Morgan Stanley lifted their estimate for customer remediation costs for the banks to $3 billion over the next two years, up from an earlier forecast of just $500 million.

Morgan Stanley reckons the big banks will incur another $2 billion in customer remediation costs in 2019 and a further $875 million in 2020.

About a month ago, Morgan Stanley forecast that all customer related charges, including additional fines and penalties, would only amount to around $500 million.

But since then, the remediation costs flagged by the big banks have been “earlier and larger than forecast”.

Westpac said its 2018 earnings will be cut by an estimated $235 million, due to refund costs associated with faulty financial planning advice.

ANZ this week warned of an additional $374 million related to similar acts of misconduct. The Commonwealth revealed $20 million this week as well, on top of $155 million in 2017-18.

As a result, Morgan Stanley thinks the total remediation costs will now be significantly higher, but the real costs won’t emerge until next year when firstly the bank interims are reported February for the CBA and then late April May for ANZ, NAB, and Westpac.

Three of the big four banks — ANZ, Westpac and NAB — are scheduled to report their earnings for the 2018 financial year in the next four weeks. The CBA has a first-quarter trading update due in early November

Morgan Stanley analysts wrote yesterday that the 2017-18 reporting season will be the “calm before the storm”.

“As 2019 approaches, the Australian banks face a weaker housing market, a final report from the ACCC’s “Residential Mortgage Price Inquiry”, the ongoing Royal Commission, and a looming Federal election,” the analysts said.

And with this and other uncertainty, Morgan Stanley has downgraded its 2019 earnings per share (EPS) forecasts by 4% for the big four banks.

If the bank’s earnings remain at the rate of around $31 billion they were in 2016-17, then $3 billion, and a bit more won’t have much of an impact on combined earnings of $62 billion or more in 2018-19 and 2019-20

So what did the market do yesterday?

The CBA led the gains, with the shares rising 0.3% to $68.97 despite news of a Federal Court class action application from layers Slater and Gordon claiming it could exceed $100 million. The claim is to do with superannuation clients of the CBA. ANZ shares rose 0.2% to $26.88, Westpac rose less than 0.1% to $26.98 and NAB shares were up 0.3% at $26.68.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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