ANZ’s newly appointed CEO, the $9 million dollar Mike Smith, hasn’t wasted any time in blaming others for the sector’s recent troubles. In a speech to Sydney business leaders, Smith claimed that “it is in Australia’s national interest to move beyond the four-pillars policy and allow the banking system to be subject to the same competition policy that all other Australian businesses face.”
Smith’s arguments aren’t exactly supported by mountains of evidence. For a start, the four pillars has hardly stifled banks profit growth. The big four banks, on the back of rampaging (and probably, not legal) fees have been among the market’s best performed companies over the past decade. Since 1998, Smith’s ANZ has grown from a market capitalisation of approximately $13 billion to be worth more than $50 billion. The CBA has been even more impressive, increasing in size from a capitalisation of approximately $10 billion in 1996 to $76 billion today. That doesn’t sound like an industry which has been overly constrained by the heavy-hand of government regulation.
Smith then noted that:
Our pillars policy has developed an inward looking culture within significant parts of (our) banking system [and] while successive governments have done a great job at opening up the Australian and New Zealand economies, I believe consumers are increasingly disadvantaged.
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The irony of a bank CEO purporting to stand up for consumers is not lost on anyone. While the UK is conducting a test case on the legality of bank fees (to be heard by the British High Court in January 2008), no such legal action is occurring here, despite the fact that Australians pay hundreds of millions of dollars each year in bank fees (although Family First Senator Steve Fielding, has proposed a bill which seeks to prevent banks from charging penalty fees which are not commensurate with the loss suffered).
Smith also claimed that the four pillars policy has stifled innovation in Australian banking, arguing that:
How do our ATMs compare with Spain’s Santander’s? You can practically cook dinner with a French ATM. They sell insurance, approve mortgages. It’s quite amazing. But where is that perspective in Australasia?”
Smith is contending that by removing four pillars and reducing the number of large banks from four to say two, innovation would be improved. There are a couple of problems with that notion. First, it’s not as if Australian banks are small, struggling start-ups who can’t afford R&D development (in total, the big four are capitalized at more than $230 billion). Further, in comparing Australian banks to French banks, Smith chose a bad benchmark. France’s largest bank, Credit Agricole, is valued at AU$61 billion – less than what CBA and NAB are worth. Therefore, if the smaller French banks are able to innovate, why do Australian banks need to merge to achieve the same goals?
Second, it is arguable the reason why the banks have been so pathetic with innovation is due to the cosy duopoly they are able to maintain, growing gluttonous on an orgy of illegal fees, while systematically failing to create any substantial innovation. Allowing the banks to merge would most likely inhibit development and innovation. As a general rule of thumb, companies in highly competitive environments will strive for technological growth and competitive advantage to maintain margins and grow their business, whereas monopolies, like our banking sector, grow fat and lazy.
Mike Smith received a $9 million sign-on bonus, earns $3 million in fixed salary each year and could earn another $6 million annually from incentive payments. For that kind of money, shareholders would hope that he could come up with some ideas for growth and innovation which don’t involve complaining about four pillars.