First it was Commonwealth Bank of Australia [ASX:CBA]. Last year the Senate performed an inquiry into CBA’s financial planning scandal. The senate commented at the time,
‘Here we are, 15 months or so later, and it feels like the same problems, the same culture, the same behaviour, the same techniques, are being used again’.
More recently it was ANZ banking group [ASX:ANZ]. Two disgruntled employees took ANZ to court over their dismissal, stating the bank’s culture encouraged unethical conduct. And now it’s the turn of Westpac Banking Corp [ASX:WBC].
The Australian Securities and Investment Commission (ASIC) voiced its concerns over Westpac’s credit card screening process. Apparently Westpac failed to directly inquire about income and job status when credit card customers wanted to increase their limits.
If it sounds familiar, it should. This situation is similar to the events which caused the Global Financial Crisis (GFC).
Westpac adopting bad habits
On the eve of the GFC big US investment banks gave mortgage brokers the green light to offer loans to risky individuals. And risky might even be an understatement. It came to light that individuals with no hope of repaying their loan were given one anyway.
So why did big banks want more loans? Because they could sell these loans to investors. I’ll explain. Banks had created these new products called CDOs. In these products they packages loans which contained anything from really safe loans (AAA) to the most risky loans (BBB). And because all these different loans were put together the banks considered them ‘diversified’.
Therefore rating agencies like Standards and Poor (S&P) and Moody’s gave these CDOs a AAA rating. That high rating masks the risk under the surface.
But we’re getting a bit off topic now. The point is Westpac’s screening process for credit cards are slipping. Just like the US banking standards before the GFC.
Westpac says it’s under control
In respond to the ASIC’s accusations Westpac has changed its processes and launched a review program. The review may seek to refund customers who are in financial difficulty because of their increase credit limits. Westpac was quick to act, issuing a statement to addressing ASIC’s concerns:
‘Where an increase in credit limit has caused a customer a financial issue, Westpac will put the customer right, through our financial hardship provisions, including providing a refund.’
But I suspect, just like CBA and ANZ before them, Westpac are just apologising for getting court. Not for doing the wrong thing.
Be a bank, not a friend
More and more banks are now trying to act as customer’s friend rather than their bank. One theory for doing this is the competitive edge that a friendship with customers offers. Customers will be more loyal to a friend than they would be to a company, right?
But I disagree. Once banks cross that threshold of becoming the customer’s friend, strict social norms must be upheld. Now I’m not saying it’s impossible for a company to be a customer’s friend. However, for banks it’s almost impossible.
If you just take a look at what’s happened in the past few months, banks are being caught regularly for acting unethically. And this is a death sentence for a friendship. Just think about it. What would you do if your friend lied to you and abused your trust constantly? You’d probably get a new friend. Breaking trust in a social setting is much worse than in a formal business setting.
Why is it worse? Because it’s harder to remedy the problem. Whereas if a company broke trust in a formal setting, it wouldn’t be as hard to rectify. But I doubt banks will stop their friendly campaigns.
What to do about Westpac shares
Westpac, along with all four major banks, have been a drag on the market this year. Out of the 12 trading days we have had so far, Westpac recorded three days of positive returns.
Source: Yahoo finance
Finch Rating is adding to the pessimism surrounding banking profits for 2016. The rating giant stated ‘profits will likely slow due to ongoing asset competition, higher funding costs and an increase in loan-impairment charges.’
Morgan Standley also believe the banks will be hurt, but by declining oil price. The big four banks have $31 billion in loans to oil and gas companies. Thus all four banks, according to Morgan Standley, will incur losses in the first half of the financial year.
Just like last year, 2016 might not be the year of the banks. Yet it’s still early in the year and banks may just surprise everyone counting them out.
Junior Analyst, Money Morning
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