The big danger facing Australian banks

The Australian, May 12, 2017 Robert Gottliebsen

Australian banks now face a much greater danger than the $1.5 billion tax deductible levy — quasi nationalisation.

Shareholders should be alarmed because quasi-nationalisation a serious threat to the value of bank shares Nationalisation takes place when the government buys the equity whereas quasi nationalisation takes place when government bodies control the prices of an enterprise and have power over executive remuneration and appointment.

Banks have become our four biggest ASX stocks and dominate most share portfolios so the threat of quasi nationalisation goes well beyond the fate of individual banks.

It’s ironic that the next Federal Election is due in 2019 — 70 years after the 1949 election when ALP Prime Minister Ben Chifley went to the polls partly on the issue of bank nationalisation. Robert Menzies defeated Chifley and the present private banking system was established. It’s ironic that quasi nationalisation should be undertaken by the party Menzies founded.

The banks now have no support from either of the major parties. The banks blame the politicians but the boards and management did not read the warning signs prior to the budget. And then in the panic after the $1.5 billion levy announcement they locked themselves into a situation where they have probably ensured price control on home mortgages which could easily spread to deposits and other consumer products. And that likely price control will be cemented in via the proposed unprecedented influence over bank executives.

It’s important that bank shareholders understand first how the banks fell into the trap and then how the quasi nationalisation movement could infect their operations

While I don’t like what the government has done, that’s irrelevant. It’s happened and unless the Senate votes it down (unlikely) the levy won’t change for a decade or two so we had better understand the wider ramifications.

Banks are in this situation partly because too many of them did not act with brutality to smash the management culture that led to the financial planning and insurance scandals and then deliver rapid and generous compensation to customers. If they had undertaken those actions fast the CEO’s could then have gone out on the campaign trail to show they had reformed. Instead they were slow and compensation in the public eye looked incomplete. That strategy generated bitter parliamentary debates over whether we needed a Royal Commission into banking so creating the environment that makes not only the levy but quasi nationalisation possible. Then on November 12 last year the banks had the perfect chance to redeem their public image by making their ‘100 Page” ridiculously unfair small business overdraft contracts “fair” as defined by the act. They could then have gone out to win small business and community goodwill plus generate lots of business. Instead, the task any junior lawyer could do in less than a week, is stuck in a cultural and legal morass in some of the banks. Many business loan agreements are a total mess. The redemption chance was missed.

Then we come to budget night and that dramatic 24 hours that followed. On that night Bankers Association chief Anna Bligh said that bank customers would have to fund part of the levy. Several bank chief executives made similar remarks. It might have felt good but it was an incredibly dangerous action.

In the budget lock up Treasurer Scott Morrison told me that he believed that the competition from the small banks would stop the banks trying to recoup the levy from customers.

But the banks, having decided to defy Morrison, will now have to face an ACCC inquiry into their home mortgage pricing having said publicly that they would taken an action the ACCC is there to stop. As a result almost certainly there will be an on going monitoring of the pricing of the bank’s biggest earner — home mortgages. And as always happens in quasi nationalisations control is extended beyond one body. The bank regulator APRA has already intervened to get investor loan rates up. APRA may also extend their interest rate control wings. And now that the banks have effectively declared war on the government, if there are strange moves in, say, deposit rates, they risk controls over other parts of their business. The ACCC is to set up a special unit to monitor bank pricing.

And to illustrate that they might over time extend the clamps beyond home mortgages, the government plans to clamp down on “poor practices” in the credit card market (“poor practices” is a euphemism for highly profitable practices). The government will put in place new rules on providing credit cards. London to a brick they will slash credit card profits.

Another part of the plan is to look at ways to increase competition in the industry. All the small banks will be rolling up their sleeves to show a proposed productivity commission inquiry how to do it. So not only are we planning to regulate prices but also we are looking to lower the market share of the big banks.

With hindsight, in my view what Bligh and all the bank CEO’s should have done when they saw the budget documents and the likely subsequent pricing control was to guarantee that customers would not be affected by the levy. And then make doubly sure they deliver on that undertaking so that the looming inquiry would be forced to give the banks a good report. Let the market work later when the heat is off.

I emphasise Bligh and the bank CEO’s were entitled to vigorously complain on behalf of shareholders and point out what the tax would mean to shareholders, the retirement community and indeed the integrity of the banking system. They also have strong case that this was a tax thought up at last minute without much detailed work. But in any battle be careful when you fire your shots. At this time they needed to keep right away from customers. Instead Bligh and selected CEO’s took a very high risk stance. If, as is likely, it locks in quasi nationalisation bank shareholders will not thank them.

And that post budget customer threat reinforced the government view that it was time to be more active in controlling bank executives.

Senior bank executives will be required to register with APRA and before any appointment is made banks are required to advise APRA. Penalties will be imposed on banks that don’t monitor the suitability of their executives to hold senior positions. Bonuses must be made long term. Clearly the government believes that a number of current bank executives are unsuitable for the task. I can only speculate that among those considered unsuitable may include chief executives who proposed to pass the levy onto customers.

Welcome to the world of quasi nationalised banks.

At some point the boards of the banks are going to have to construct an APRA approved executive team that can operate in this new environment. Maybe, rather than ACCC and other inquiries, the banks actually might be better with a Royal Commission. Royal Commissions give time to fix the problems.