Glenn Freeman: To say that it's been a bad week for Australian banks is really an understatement. They have collectively lost more than 1% in their share price over the course of this week. And one of the key issues that they have been examining before the Royal Commission and which has been highlighted is this issue of vertical integration whereby banks not only develop the products, but they are actually selling them through their financial advisors.

Now, David Ellis, Morningstar's Senior Banks Analyst, has some very strong views on what we've seen with this Royal Commission and with previous inquiries and cases that have been before the courts in recent times. And he held firm on his fair value estimate for banks which is not likely a consensus view. So, should investors be looking to divest themselves or to move away from their bank stocks in some way? Or should they hold firm? And how does this news affect their portfolios?

Now, David, virtually every Australian of a working age is a shareholder in Australia's banks by virtue of super funds holdings of banks. Now, should they be concerned?

David Ellis: Well, obviously, yes. Yes, they should be concerned. But it's not just the issues that are coming – that are likely to result from the Royal Commission. Share prices are off over the last three months or so, not just because of the Royal Commission. There's a lot of other reasons. Global volatility, the expectational threat of higher interest rates which may affect margins. There's obviously trade tensions increasing or escalating between the U.S. and China. There's other Middle East problems. There's problems with Russia. So, there's a lot of factors that are playing or that are causing those share price weaknesses.

At these levels, I think, the banks are attractive, particularly Westpac and CBA. They are trading at 13% to 15% discounts to our valuations. But looking ahead, at this day – the Royal Commission is only at an early stage. But what we've seen and heard today has been of course, very damaging for their brands, but it's particularly in the financial planning sector. Now, the banks have been progressively moving away from the wealth businesses to varying degrees. ANZ announced the sale last year of a part of its financial advice business to IOOF.

But overall, the wealth businesses are not large profit contributors for the major banks. And obviously, they are causing a lot of problems, PR and public regulatory problems. And I think we will probably see an acceleration of the major banks downplaying, downsizing, reducing emphasis on particularly financial planning and financial advice. The vertically-integrated business models that the banks adopt, and AMP and IOOF in particular, is obviously coming under a lot of scrutiny from the Royal Commission and there could be changes in that regard going forward.

So, I think we will see the banks focusing more on commercial banking, traditional banking in their retail and their business banking sectors and maybe a slight deemphasis on wealth.

Freeman: And you referred to wealth management as being a relatively low profit contributor for the banks. Can you put some numbers around this for us?

Ellis: So, Westpac has the highest proportion. About 11% of its profits come from its wealth business. But ironically, Westpac seems to be the best at integrating and operating their wealth business. Commonwealth bank is about 6%, same with ANZ and NAB is around about that 5% to 6% group earnings, so a small contributor.

Freeman: And finally, is wealth management a viable business model for banks going forward? And could be see something of a shakeup in terms of rationalization or other changes for Australia's banks?

Ellis: No, I don't think. I mean, we have the four pillars policy in Australia. The government is very much aware of the crucial role that banks play in the economy. And they will be very careful with adopting any recommendations or implementing any recommendations from the Royal Commission that may affect the structural integrity of the Australian financial system. There are no problems with the financial stability in Australia and Australia has a strong banking system, a strong financial system which supports the economy. And so, primarily for those reasons, I don't expect any major changes to the structure of the four major banks in Australia in the near term.

Now, we are expecting the economy just to continue to grow. Our GDP growth rate is around 2% to 3% P/E for the next few years. We have strong employment growth. We've got historically low interest rates. Credit growth is good. The operating conditions, the operating environment for the major banks is good. It's not strong, but it's good. So, I expect the banks will continue to make – to increase profits modestly over the next four to five years and dividends should follow.