10 August 2016
by James Eyers

Bill Shorten targets bank profits, banks target Shorten

Labor leader Bill Shorten is using banks' reporting of profits to ramp up his campaign for a royal commission, demanding that the "greedy" banks should be investigated for putting profits and executive rewards before customers. Mr Shorten did not rule out supporting a new tax on bank profits.

But the banks are preparing to hit back at Labor, arguing its attacks would ultimately hurt shareholders, superannuants and depositors.

Commonwealth Bank of Australia chief executive Ian Narev, who has so far held fire, will use the announcement on Wednesday of an expected record annual profit approaching $9.5 billion to explain why the nation's biggest bank did not fully pass on to its mortgage borrowers last week's 25 basis point cut in the Reserve Bank's official cash rate.

Mr Narev is expected to make the point that more than 70 per cent of CBA's profits are returned to "mums and dads" shareholders as dividends and that superannuation funds also benefit from healthy bank stocks. CBA is expected to freeze its final dividend at $2.22 a share on expectations of a contraction in second-half profits.

Amid warnings of a new deposit war among the banks, Mr Narev will also highlight the need to keep interest rates on deposits high enough to retain the bank's large number of depositors, who provide most of the funds the bank uses to lend.

ANZ Banking Group said on Tuesday its cash profit for the first nine months of the financial year dipped 3 per cent to $5.2 billion, weighed down by growing bad debts.

Mr Shorten said the banks undermined their case against a royal commission "when they chose to pocket some of the reduction in the official interest rate instead of getting the economy going".

"There's a culture in banking which puts the profits of banks, big profits, billions of dollars of profits ahead of the national interest and interests of mum-and-dad mortgagees, small businesses and people with large credit card interest rate debts," he said.

Asked if he supported a tax on bank profits, Mr Shorten said: "First things first. Let's cross that bridge when we get to it, and let's just get a banking royal commission under way."

ANZ chief executive Shayne Elliott said on Tuesday the decision to only pass through half of the cash rate cut to mortgage customers would allow ANZ to pay more to savers. The bank has five times as many depositors as borrowers. "We need to get that balance right because without those really valuable deposits, we don't have any money to lend out," he said.

Banking analysts say Australia's major bank profits will come under pressure from rising bad debts and tighter net interest margins, which are being driven down by the low interest rate environment and rising funding costs. This could put pressure on dividend payout ratios. In May, ANZ reduced its interim dividend to 80¢ from 86¢ at the previous half, but the other major banks are yet to re-base their payouts.

Mr Elliott provided a cautious narrative on the economy, saying: "The world we're living in at the moment is one of subdued growth, we see that right across most of the world, but that's also starting to be much more true here in Australia, and I don't think that's a short-term thing.
"In Australia, we've had it really good for a long period of time, but it's just getting a little bit harder."

Analysts expect CBA's profit for the June half-year to be down about 2 per cent compared with the December half, a product of skinnier margins. "The combination of another rate cut and CBA's response puts downward pressure on margins, and the risk of a resumption in the 'war on deposits' is growing," Morgan Stanley analyst Richard Wiles said.

Mr Shorten used last week's refusal by the big four to fully pass on in the 25 basis point cash rate cut to mortgage customers reignited his call for a royal commission and was backed by most independents and crossbenchers in the finely balanced Parliament.

Prime Minister Malcolm Turnbull tried to nip it in the bud by announcing that at least once a year bank executives would be compelled to appear before Parliament's house economics committee to explain their actions and decisions, including responses to movements in the cash rate.

Mr Shorten said Mr Turnbull would eventually cave in to a royal commission. "He's already feeling the pressure, the banks humiliated him last week and the best he could come up with was an annual lunch and a committee and a chat with the banks. That's not good enough," he said.

"I think the first step to reforming banking is a royal commission, which would include an examination of the payment structures to the most senior executives which sees them rewarded for putting banks' profits ahead of community interest.

"We want to see how widespread the scandals are in the banking sector. We want to understand what it is about the culture and business standards of banking which seems to trigger scandal after scandal after scandal. We want to see how well resourced the regulator is for dealing with these issues."

Investors Mutual fund manager Hugh Giddy said that given higher funding costs and growing pressures on margins "banks should not be pilloried for not passing on the RBA rate cut". However, he said there are other reasons for Australian banks' relatively high returns on equity (ROEs) that warranted investigation.

"When you look at our big four banks compared to other big banks around the world, they have very high non-interest income. This means that fees are high, such as the costs of sending money overseas or making withdrawals and the like," Mr Giddy said.

"High ROEs are a function of not having to hold much capital against mortgage books, and very high non-interest income. If I were a politician, I would not just be focusing on interest rate cuts but looking under the hood and asking why banks have higher ROEs than global banks – and realising it is a fee oligopoly."