ANZ $824 million profit hit, other banks to follow
Morningstar equity analysts have warned that ANZ will not be the last bank to face compensation costs.
Morningstar analysts have downgraded their earnings forecast for Australia & New Zealand Banking Group following news that the lender is facing record compensation costs and have warned that other banks could face similar charges.
ANZ, which is due to release its full-year earnings at the end of this month, announced $421 million in post-tax remediation costs to cover customers charged fees for no service and inappropriate financial advice.
ANZ's remediation bill includes $127 million for businesses recently sold to IOOF, while other items include $159 million in restructuring costs and $38 million in royal commission legal costs. The profit hit will total $824 million.
Morningstar senior equity analyst David Ellis says the update confirms the current "sorry state-of-affairs" facing the major banks, particularly around customer trust.
"The Royal Commission has forced the banks and other financial service firms to publicly admit to a litany of very poor customer outcomes, with the focus on the banking oligopoly’s disappointing track record for proactive identification and correction of errors and omissions during and up to the past decade," Ellis says.
"Under the scrutiny of the Royal Commission, the major bank behaviour towards customer remediation has been found wanting, leading to a series of expensive customer compensation announcements."
Cash earnings forecast downgrade
Morningstar analysts have reduced wide-moat-rated ANZ's forecast cash earnings for continuing operations by $584 million to $6.3 billion for fiscal 2018.
The costs are weighted toward the second half, with $711 million to be recorded in the six months to September 30.
ANZ is the second large Australian bank to warn of mounting remediation charges. Rival Westpac last month alerted the market that full-year cash earnings would take a $235 million hit due to a provision for customer compensation and litigation.
Ellis says that he would not be surprised to see National Australia Bank announce similar charges before the bank reports fiscal 2018 results on 1 November 2018.
In the days following the release of Kenneth Hayne's scathing 1000-page royal commission interim report, Ellis predicted a continuation of heightened levels of uncertainty for bank stocks, adding that he can see no major positive catalyst for the earnings in the next six to 12 months.
At current prices, Westpac (ASX: WBC), Commonwealth Bank (ASX: CBA), and National Australia Bank (ASX: NAB) are most undervalued, trading 27 per cent, 18 per cent and 17 per cent, respectively below Morningstar valuations. ANZ Bank (ASX: ANZ) is today trading below valuation having fallen 2.5 per cent since open this morning.
The chief executives of the big four major banks are due to be questioned by the House of Representatives committee on economics on Thursday and Friday, with a third hearing day to be held next week.
Committee chair and Liberal MP Tim Wilson says the hearings will be an important opportunity to consider how to ensure appalling behaviour is not repeated among the banks, without taking away from their essential role in the economy.
Ellis notes that the ANZ's strong capital position is "little affected" by the charges and costs, and that the final dividend for fiscal 2018 is unlikely to be impacted.
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Emma Rapaport is a reporter with Morningstar Australia, based in Sydney.
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