Investors should remain calm as revelations from round two of the Banking Royal Commission come to light, says Morningstar senior equity analyst David Ellis

The big four banks have seen their share prices hit by “sensationalist media” and “grandstanding politicians”, Morningstar equity analyst David Ellis said today, but strong fundamentals should reward investors over the long term.

Ellis added that while news may cause the stocks to fall, shareholders would continue to benefit from solid fundamentals delivering modest earnings growth.

"The major banks seem to be operating in a parallel universe,” Ellis said. “On the one hand, it’s all doom and gloom with investors facing a daily avalanche of negativity. But on the other hand, capital levels are strong, loan quality is pristine, the economy continues to chug along at a respectable 2-3 per cent growth rate, employment growth is strong, credit growth is solid, inflation is low, and the housing market is stabilising.”

“Investors should remain calm; current headwinds will dissipate after a difficult next 12 months, and long term we expect satisfactory shareholder returns, albeit lower than the stellar returns experiences during the past decade.”

Investigation is a risk to share prices

Ellis conceded that the ongoing investigation by the Royal Commission is a key risk, and casts a long shadow over the major banks and their share prices but insists the number of problem cases remains small and in Morningstar’s view, is not a true representation of the major bank’s customer base.

“Major banks are likely to tighten lending standards, though not to the point of instigating a credit crunch and unleashing disastrous consequences,” Ellis said.

“Increased regulatory oversight restricts cross-sell opportunities, future business growth, investment and innovation.”

To date, the Royal Commission have received approximately 3,200 public submissions. In Australia, the Commonwealth Bank (ASX: CBA) has 13.8 million customers.

Inappropriate financial advice and financial industry misconduct are the current focus areas of the Royal Commission's head, Kenneth Hayne. This follows a fortnight of hearings on consumer lending, home lending and mortgage brokers.

Yesterday, AMP Limited (ASX: AMP) bore the full force of Commission, with the wealth manager admitting to a policy charging thousands of customers for advice services it did not provide.

The inquiry heard that under a scheme known as ‘buyer of last resort’, "orphaned" customers inherried from AMPs financial planning network were charged fees for a period of three months even though they had not recieved advice.

Responding to questioning from senior counsel assisting the commission Michal Hodge QC about whether he was surprised that charging clients for advice that they did not receive was unlawful, AMP's head of advice Anthony 'Jack' Regan responded: “No.  It’s not a surprise that it’s not lawful.”

AMP executives admitted the company mislead corporate regulator ASIC over the fees by covering up the nature of the scheme.

The Commission also heard that AMP’s financial planning arm had identified 81 advisors which had engaged in fraudulent, illegal or deceptive conduct, and another 440 advisers with potential compliance concerns.

More than 300,000 customers across the big four banks and AMP could be in line for a total of $219 million as compensation for fees paid for not service. More than half of this compensation bill, $117.8 million, is being paid by the Commonwealth Bank.

Big four banks under scrutiny

AMP was the first on the chopping block, but representatives from the Commonwealth Bank, National Australia Bank (ASX: NAB), Westpac (ASX: WBC)  and ANZ (ASX: ANZ) will all be called to give evidence of their conduct over the next two weeks.

The Royal Commission also heard evidence from ASIC that following a review of 137 licensees of self-managed super fund, that 90 per cent had failed to comply with the best interests of their clients.

Responding to questions from the Commission, ASIC deputy chair Peter Kell described the results as “very disappointing,” and noted that the financial advice industry is struggling to get to grips with how to implement the key best interest duty requirements. Kell added that for the majority of files reviewed by the regulator, that there was no indication of consumer detriment.

On Friday, ASIC accepted an enforceable undertaking from two Commonwealth Bank subsidiaries - Commonwealth Financial Planning (CFPL) and BW Financial Advice (BWFA) over fees charged for advice that was not provided. The undertaking follows an ASIC investigation which found that approximately 31,500 customers were charged for ongoing services which were not provided to them. CFPL and BWFA will be required to make a community benefit payment of $3 million.

Today the Royal Commission will continue to quiz AMP on its practice of fee for no service.


Emma Rapaport is a Morningstar reporter, based in Sydney.

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