banking royal commission

The financial sector is stepping up its pushback to the damaging publicity from the Hayne royal commission as Australian Bankers Association head Anna Bligh, a past master of spin as former premier of Queensland, has issued a mea culpa or three.

The campaign will see the banking code of practice reformed, fees not charged on the accounts of deceased people and grandfathered commissions outlawed. A new era is promised, but will anything really change? Will the financial impact be all that dramatic and will it really cost the banks?

Probably not. Just as the banks easily paid for the 2016 bank levy from the Turnbull/Morrison government, the financial impact from the Hayne royal commission will be a pinprick.

According to evidence to the royal commission from ASIC, the banks are likely to be asked to refund around $1 billion for fees charged for no service. That $1 billion estimate will lead many to think the banks are being penalised, but that’s far from the truth.

Why won’t the $1 billion refund make a dint?

The cost will be easily met from the recent spate of rate rise for mortgages, which came on top of higher rates for interest-only loans which was extended to other home loans as well.

That has already lifted the net interest margins of the Bank of Queensland and Commonwealth. We will see the impact on NAB, ANZ and Westpac when they report their 2017-18 results in the next three weeks. The September lift in home loan rates has already gone into force from this month or late September. That means an extra boost for the bank’s net interest margins which are one of the key measures for a bank, along with its cost-to-income ratio.

Not the first time

Remember the laments from the banks and their media and market mates about the $6.4 billion four-year major bank levy imposed by the Turnbull government in the 2016-17 budget?

That was easily paid for by a combination of interest rate rises, falling funding costs, falling bad debt provisions and judicious cost cuts. The annual cost was more than $1 billion, which had little or no impact on the bank’s profitability.

The big four bank earned a combined profit of $31 billion in the 2016-17 financial year, which was up 6.4% from 2015-16, according to a KPMG report.

That report shows where the banks will get the money from — interest income of $61.3 billion in 2016-17. A 1% improvement in net interest income across the banks adds more than $600 million to that figure which will be higher in 2018-19 due to September’s 0.14% boost to bank mortgage rates by the ANZ, CBA and Westpac, but not NAB which is now in its own counterattack/charm offensive.

According to UBS banking analyst Jonathan Mott, for the ANZ at least, that 14-point increase was double what was really needed to cover high wholesale funding costs.

“This round of repricing is significant in that it passes through more than the additional wholesale funding costs to existing customers — especially at ANZ,” he wrote. “In fact, if wholesale funding costs remain at current levels we estimate it will cost ANZ approximately $150m pre-tax. However, we estimate ANZ’s mortgage repricing is almost twice that large at around $300m pre-tax.”