With the royal commission behind them, Australia’s big banks might have thought they could finally grasp some clean air.
The daily task of baulking the media throng outside the commission. QC’s and SC’s detailing actions that no CEO could possibly defend.
Now the process is one of remediation.
To do that, each bank has a team of people managing the process. Each with millions of customers, it is a huge, and time consuming, task.
National Australia Bank Ltd [ASX:NAB] has had to double the number of staff dedicated to the process. Right now, it has nearly 1,000 people doing just that.
However, apart from time and money, there has been another cost. While preparing for the commission — and now remediation — senior management have been distracted from their primary role. That is, running their businesses.
They have each allocated funds and a timeline to the remediation process. It is now a matter of getting it done.
Commonwealth Bank of Australia [ASX:CBA], which reports earlier than the other three, also has a clear time and budget to deal with the remediation process.
That, too, is well underway. CBA has already returned around $600 million of the $1.2 billion it has identified that it owes to its customers.
Behind the headlines
The revelations from the royal commission stole plenty of headlines. In the meantime, however, there was plenty more going on in the background.
While the bubble might not have ‘popped’, the property market certainly started to slow down. Auction clearance rates dropped as prices in the major metropolitan areas began drifting lower.
Adding to the banks’ woes, new construction of residential dwellings fell off a cliff. The ABS reported a near 20% fall in building approvals for the 12 months to September.
By any stretch, that drop alone was enough to put a big dent in the banks’ business.
Another issue for all banks has been the RBA cutting the cash rate. As interest rates have fallen, so too have banks’ margins.
This margin — the difference between what a bank borrows and lends at — is a key performance factor. The tighter this margin becomes, the tougher it is for banks to maintain their profits.
The only way to counter this if they can grow their lending book. And that is where NAB, ANZ and Westpac have come into trouble. While noting that there has been some recent signs of recovery, trading conditions remain challenging for all.
While ANZ was able to maintain its dividend, it now comes with lower franking credits. In their results, both Westpac and NAB announced significant drops in profits…and dividends.
Westpac also took the opportunity to undertake a capital raising — another challenge now facing the banks. That is, the need to hold more capital to lower their overall gearing.
One bank standing out
The real test to see how the banks are faring will come in February next year. That is when CBA releases its half-year results. The other three will follow some three months after that.
However, in its quarterly trading update — that coincided with the release of Westpac’s results — CBA is showing signs that it is moving further ahead of the pack.
While Westpac, and both NAB and ANZ, experienced soft results, CBA’s trading update showed a bank getting on with business.
Excluding notable items, unaudited cash net profit increased 5% to $2.3 billion for the quarter. And in the key area of volume, CBA’s home lending grew at 3.5% for the quarter (annualised), with business lending volume growing at 2.8% for the quarter (also annualised).
Net interest income also rose 2%, off the back of this growth in home and business lending.
Mum and dad depositors
However, CBA enjoys another advantage in the sheer size of its depositor funding. 69% of CBA’s total funding comes from its own depositor base. That equates to a huge and steady source of funding.
And for CBA, much of this funding is practically free. There are a swag of accounts CBA offer that pay no interest at all.
Of course, for a lending institution, income and margin is one thing. The other side of the coin is the quality of the loan book.
For CBA, impaired loans increased slightly for the quarter. However, they represent just 0.16% of CBA’s total loan (and acceptance) book. Customer arrears — representing those who are 90 days or more behind on their loans — actually improved for the quarter.
So what does this all tell us?
Results show Commonwealth Bank snaring market share
Now that the dust is settling, it is plain to see how much other banks are hurting. While the other three are struggling to grow their business, CBA continues to take away their market share.
The more products a new customer takes up with a bank, the less likely they are to move on again to another bank. For many, it is just not worth the time or hassle.
With a funding advantage, and the largest number of customers, CBA is Australia’s most powerful bank.
What’s more, while NAB and Westpac have had to cut the size of their dividend (and ANZ their franking credits), CBA believes that they will be able to maintain their dividend into the future.
In a low interest rate environment, it is not only the size of dividends that matter. It is also about their stability, which will become ever more important to income investors.
All the best,
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