by Matthew Haupt

Last year I wrote about the key risks facing Australia’s major banks, focusing on APRA’s definition of “unquestionably” strong, and explained why we had lightened weightings in the banks. Here I update on our view for Livewire. In the original wire, which you can see here, I wrote:

“We have lightened our weightings in banks given the good run and hence valuations. I think the risk around APRA, ACCC supervision on rate settings, slower credit growth all point to subdued earnings for the banks. Until we get clarity on capital, I believe there is too much risk at these levels to have large positions in the banks.”

One year on

The biggest issue facing the banks now is, of course, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

We are focused on the potential for punitive regulation, and the possibility of the Household Expenditure Measure (HEM) being abandoned.

The Royal Commission hearings have dominated negative headlines as highly unethical practices have come to light. These individual stories, while disturbing, do not necessarily point to systemic or structural issues within the sector.

Credit harder to get

As a result, punitive regulatory responses may not fit the crime and far worse, may limit access to credit within the Australian economy in general and by some demographics in particular.

APRA’s campaign for the banks to reduce their reliance on the HEM, a key benchmark used by the banks to estimate a loan applicant’s annual expenses, may have similar ramifications.

Its replacement with specific and targeted expense calculations would likely lead to increased lending costs. As well as limiting access to credit and potentially leading to discriminatory pricing for some borrowers, this could well cement the major banks’ market share.

Wholesale lending costs to bite

Another issue currently in play for the banks centres on warnings about the impact to earnings from increased wholesale funding costs. This recently saw the Bank of Queensland, AMP and Suncorp repricing to offset additional costs.

This move is a catalyst for the big four banks to follow suit, increasing lending rates out of the official Reserve Bank of Australia cycle.