There is a sense of things having changed in Australian banking. Having sailed through the global financial crisis like no other developed-world country bar Canada, Australia has finally acquired some of the problems of that era eight years later.
There is public outcry about ethical and behavioural issues; there are accusations of rate-rigging; there are concerns about the strength of residential real-estate assets; and the end of the mining boom has clearly impeded the outlook for the economy.
Shayne Elliott, ANZ
“In terms of the operating environment, that’s changed enormously,” says ANZ CEO Shayne Elliott. “Since the last recession in Australia in 1992, we have had this unbridled growth as a sector. Our number-one product – which is borrowing money – has been growing at double-digit rates for almost all of that time. In many ways, we have all the symptoms of an emerging economy.”
Margins have come down, but not damagingly so. “If revenue is growing by 6% to 8% per annum, you can spend 3% to 5% and still feel pretty good about yourself.”
But that is over. After the mining boom ended, GDP growth fell and demand for banking products slowed. By the time that happened, average household debt had gone from 30% of income in 1990 to 185%.
“That is massive leverage and that’s what sparked all that growth in credit,” says Elliott. “Well, that can’t happen again. It can’t go from 180% to 330%. That would be a disaster. So demand for my product is going to slow right down.”
That will bring more competition and pressure margins, while at the same time credit costs are increasing, providing a further drag on earnings. “Earnings growth is going to be much harder to come by. The only answer is productivity and rethinking business models.”
Elliott argues that concerns about a real estate crash are overdone. Unemployment is still only 5.7%, despite the end of the resources boom. Even if delinquencies are rising in mining-heavy Western Australian towns, they are coming off an incredibly low base.
But some analysts are not so sure.
“There’s trouble ahead,” says CLSA analyst Brian Johnson. “There’s trouble ahead for share prices for all four of them [the big four banks]. If you look at the build-up of debt-fuelled asset bubbles around the world, in Australia, it’s household debt. And if you break it down in the simplest terms, what has Australia emerged with? A lot of foreign debt and really expensive house prices.”
On the reputational side, ANZ has had a rough ride. Its name has been damaged by a court case by a former trader, Etienne Alexiou, who sued the bank for A$30 million for unfair dismissal after it sacked him for sending lewd messages in internal communications systems. He – like another former trader, Patrick O’Connor, sacked last year – had alleged a culture of inappropriate behaviour on the bank’s global markets desk and kept the newspapers busy with lurid tales of strip clubs and drug use.
Both Alexiou and O’Connor subsequently dropped their cases, but the damage was done. Worse was to come when the Australian Securities & Investments Commission charged ANZ with possible rigging of the Bank Bill Swap Rate. Westpac and NAB have since been similarly charged; the court case is pending.
Asked if there is a behavioural problem in Australian banking, Elliott says: “I think that’s a big generalization. There has been a behavioural problem around some bankers in Australia absolutely, and we terminated a couple of employees who violated our code of conduct.”
But, he adds: “Social expectations of banks and their behaviour and understanding of right and wrong, has changed.” In his first comments to investors and analysts after the half-year result, he spoke of “a purpose and values-led transformation of the bank” as one of his key strategic priorities.