I'm Glenn Freeman for Morningstar, and I'm joined today by our Senior Equity Analyst, David Ellis.
David, thanks for joining us.
David Ellis: Pleasure. Thank you, Glenn.
Freeman: Now, David, just firstly, we've seen the Parliamentary Committee on Banking that was held just last week. Has that had any material impact on the big four banks, on CBA, Westpac, ANZ and NAB?
Ellis: No, very limited impact and we actually saw all four major bank share prices increase during the week when the inquiries were being held. I think the key takeaway is that there were some interesting and worthwhile issues that needed to be raised and the bank CEOs were questioned on these.
But I was a little bit disappointed with the quality of the questioning. Some of the questioning I thought was a clear indication that some of the parliamentarians didn't understand the complex banking system in the way banks operate, which I suppose is not surprising.
But looking forward, there will be some changes that are going to come out of the inquiries and I think the Prime Minister has announced the establishment of the banking tribunal.
And there were some other issues such as bank account portability, positive credit reporting, more open access to customer data information. Some of those things the bank CEOs acknowledged and indicated that they would be considered or they wouldn't stand in the way of, but it will take time, in years, for some of these things to be implemented.
I think the most important takeaway is, and this gets back to my point earlier about the quality of the questioning, I think it was clear that the parliamentarians didn't have or don't have enough expert resources, research resources, to support them in asking probing, important and intelligent questions and I think the next round of parliamentary inquiries, which I think is in 12-months' time, approximately 12-months' time, I think we'll see that the parliamentarians will be better resourced, have more probing, more tougher questions for the banks' CEOs.
So, I think they got off relatively lightly and I think in approximately 12-months' time it's going to be tougher for them.
Freeman: Now, given the increased capital requirements for international banks that we're expecting to see handed down later this year, do you think this is something that will negatively affect Australia's banks?
Ellis: Well, I think, that negative impact has already built into the share prices and has been over the second half of last year and throughout most the first half of this year.
However, the political landscape in Europe is changing significantly and I think there currently is and I think it will increase pressure from European governments on the Basel Committee to water down or reduce the impact of any future capital requirements, high capital requirements involved in in Basel IV.
The European banking system just can't handle it. And it will be interesting to see whether those capital requirements are watered down. We won't know until later this year.
It's expected that Basel IV will be released before the end of this calendar year. Then it will take APRA…a few months to assess it. So, we won't know until the middle of next year. And I'm expecting the Australian major banks will have to increase capital levels.
But most importantly, and this is very important, I don't expect large one-off capital raises by the four major banks next year. Any higher capital requirements that APRA will introduce, I'm expecting to be implemented over a number of years, three years perhaps…or four years, and I think that the four major banks are well-positioned to raise that capital organically rather than going to the market with large capital raises.
And what I mean by organic capital, I'm talking about future retained earnings, I'm talking about dividend reinvestment plans, asset sales and we've seen that just this last week with National Australia Bank completing the 80 per cent sale of their Life business to Nippon Life for approximately A$2 billion.
So, asset sales will continue to play a role, but more importantly, better capital utilisation. So, what I mean by that is that the banks – and this is nothing new, they’ve been doing this for many, many, many years is focusing on moving out or reducing exposure to low returning businesses within the bank groups and focusing more on higher profitable businesses.
So, we'll see more of that. And lastly, if needed, the banks can always do DRP underwrites, so Dividend Reinvestment Plan underwrites.
So, I see the banks raising any additional capital and roughly, I'm seeing – I think $20 billion is probably around the mark in total for the full, so roughly 4.5 billion, 5 billion each. But importantly…I see that being raised over three to four years from organic sources.
So, there is actually potentially upside to bank share prices. If the Basel IV regulations are voted down and/or APRA does implement a staged or a delayed implementation period, I think that will be a positive for bank share prices because it's certainly being impacted today by expectations of large capital raisings next year. I don't see that to be the case.
Freeman: Now, just lastly, you mentioned there about NAB selling off part of its life insurance business. We've also had ANZ announcing plans to divest its wealth management business. Could this be part of a broader trend that we see, of banks refocusing on their core banking activities?
Ellis: Yeah, absolutely. And we have seen that over the last two years or so. We have seen ANZ sell its Esanda business to Macquarie Group. We've seen National Australia Bank finally exit the UK with the IPO and sell off the Clydesdale Bank in England and Scotland.
And as we just mentioned, National Australia Bank again with their 80 per cent sale of the life business. And there's quite a number of smaller asset sales within all four major banks that aren't as significant as those ones what I've just highlighted, but we'll continue to see refocusing as you pointed out.
ANZ is de-emphasising its Asian growth strategy that they had implemented. They've doing it running for about seven years or so. So, the focus is on Australia and New Zealand, the core businesses of retail banking and business banking for all four major banks and that's where the profits are and that's where solid growth is. So, that will be good for shareholders; that will be good for profits; it will be good for dividends and it will be good for share prices.
Freeman: David, thank you very much for your time.
Ellis: It's a pleasure, Glenn. Thank you.
Freeman: I'm Glenn Freeman for Morningstar. Thanks for watching.