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Fears grow bank inquiry will affect borrowing levels

Lex Hall with AAP  |  02 Oct 2018Text size  Decrease  Increase  |  
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Day of shame, unbridled greed, victims unheard, toothless watchdogs, and fears of a lending squeeze.

These are just some reactions to and feared repercussions of last Friday's interim report of the Kenneth Hayne-led royal commission into misconduct in the banking and finance industry.

Banking shares lifted, however, after the report's release as the market appeared to price in the reputational damage. They have since retreated amid wider reaction to the Hayne's scathing 1000-page report, which pointed blame squarely at the "greed" of the major banks, citing in particular their failure to fully assess the financial situation of borrowers. 

In clear, jargon-free language Hayne took aim at the banks, insurers, wealth managers, financial planners, mortgage brokers and superannuation funds, citing a culture of greed stemming from bonuses and a failure to follow and enforce existing rules.

Hayne royal commission banking inquiry

Kenneth Hayne is reluctant to add more layers of compliance

Reaction has been swift. The Australian Banking Association said the report marked a "day of shame" for Australia’s lenders, and the federal opposition has called for the inquiry to be extended beyond it’s February deadline, despite Hayne's insistence that he needs no more time. There are also wider fears of a squeeze on home lending. 

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The heavyweight financials sector endured its worst day in a month on Monday as the blows from the report began to bruise, but the big banks regained some early ground.

The public holiday session saw the banks lose between 0.8 and 1.6 per cent, but Tuesday's open saw Westpac (ASX: WBC) down 0.33 per cent to $27.41, and Commonwealth Bank (ASX: CBA) down 0.21 per cent to $70.27. ANZ (ASX: ANZ) and NAB (ASX: NAB) were flat.

AMP (ASX: AMP) shares fell by more than 1 per cent on news the Australian Securities and Investments Commission was preparing to launch the first royal commission-related legal action against the wealth manager over the fees-for-no-service scandal.

Labor pushes for more action

Hayne is reluctant to add more layers of compliance, saying the regulators - ASIC and The Australian Prudential Regulation Authority - failed to live up to their mandate. Both agencies have since acknowledged the seriousness of the report's findings, saying it "raises many important questions and issues".

The fallout has become increasingly political. Opposition leader Bill Shorten has upped the pressure, saying banking executives should face harsher penalties. "If you steal from a bank, you go to jail, but if a bank steals from you, they get a promotion and a bonus and a big car," he said on Tuesday.

Labor's financial services spokeswoman Clare O'Neil has blamed the government for not giving the royal commission enough time. She will embark on a listening tour to hear more stories from victims. The inquiry received more than 10,000 submissions from the public about their past experiences, 61 per cent of which focused on the banking industry. The government maintains all of the submissions have been read.

Treasurer Josh Frydenberg said on Tuesday the government had consistently offered to extend the inquiry if the commissioner asked for an extension. He said the government's focus was ensuring better conduct in the financial system, with a greater culture of compliance.

Fears over borrowing capacity

The immediate fallout has also spread to the local housing market and stoked fears of a squeeze on lending. Homebuyers will not be able to borrow as much money once banks move to fully verify their expenses, with some analysts tipping it will reduce maximum borrowing capacity by about 30 per cent.

housing picture royal commission

There are fears the inquiry will reduce borrowing capacity by up to 30pc

Verification calls for more than taking the consumer at his or her word, Hayne said in his interim report, dismissing bank arguments that verifying a consumer's outgoings is too hard.

UBS banking analysts said Hayne's statements show banks' attempts to validate borrower expenses by increasing the number of expense categories they collect during a loan application still does not constitute verification.

"We estimate that a move to full expense verification is likely to reduce maximum borrowing capacity by approximately 30 per cent," they said in a research note.

UBS estimated current improvements and tightening of underwriting standards by the banks have already reduced maximum borrowing capacity for owner-occupiers by 7-10 per cent and by about 20 per cent for investors. "Therefore there is likely to be a further substantial tightening in maximum borrowing capacity to come."

They said the interim report suggested further tightening of underwriting standards was required for banks to fully comply with responsible lending laws.

"We believe that the current credit squeeze is likely to worsen as the banks move to comply with a more rigorous definition of responsible lending."

Banks will have to do more to verify customers' income and actual living expenses rather than rely on the widely-used benchmark household expenditure measure.

Property data firm CoreLogic head of research Tim Lawless said a more conservative lending approach going forward is likely to impact further on the availability of credit.

"If credit conditions do tighten further from here, we can expect housing market activity to follow suit," he said.

While Hayne has not made any recommendations yet, Morgan Stanley analysts believe wide-ranging reform is likely.

They said the probability of changes to legislation may be lower than they had thought given comments in the interim report, but the probability of structural change for the banking industry now seemed higher.

"We continue to believe that a reduction in profitability may be required over the next few years in order to win back the support of key stakeholders and enhance long-term sustainability," their report on Australian banks said.

The UBS analysts said any hopes the royal commission's final recommendations may be watered down or not adopted by current or future governments "appears highly optimistic", given comments from the Treasurer and calls by Labor to extend the inquiry.

Global ratings agency S&P noted the banks have started to implement changes to conduct, culture and governance ahead of the royal commission's final recommendations.

 

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Morningstar with AAP

Lex Hall is content editor, Morningstar Australia

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. Lex Hall is content editor with Morningstar Australia

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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