“While our strategy to reduce complexity, invest in capability and tell our story has delivered solid results and strong growth in customer numbers, the lack of fair competition in Australian banking continues to inhibit true customer choice,” she said.
Baker called out weaknesses in the Hayne royal commission.
“Whilst the royal commission final report makes strong industry-wide recommendations to improve customer outcomes, little goes to the issues of competition and a level playing field, something many inquiries cite as being essential to better customer outcomes, and a point we’ve made for years.
“There is considerable scope for government to supplement the recommendations with pro-competition initiatives, including addressing the ‘too big to fail’ funding cost advantage accessed by the major banks, enhanced risk-weight settings that would result in fairer capital outcomes across all banks and the disproportionate cost of regulation on smaller participants. A less competitive environment means poorer customer outcomes.”
But Baker should recognise that the slump in the Bendigo share price on Monday was not because of industry structures and long standing regulatory settings. Bendigo’s management should put their hand up for several black marks in the latest results.
Where’s the due diligence?
The first is the negative jaws, which refers to expenses growing faster than revenue. Bendigo’s expenses rose $18.7 million or 4.2 per cent due to increases in staff costs, legal costs and software licence fees. Revenue went backwards by 1.5 per cent.
Regional banks have long complained that they have compliance and regulatory burdens disproportionate to their size. But Baker admitted that higher regulatory costs were partly caused by the bank’s purchase of a financial planning firm involved in fees-for-no service breaches.
One wonders who did the due diligence on that purchase and whether they still work at the bank.
Another black mark goes against Bendigo’s credit risk management function. Bendigo’s net impaired assets rose by $45 million or 25.5 per cent in the six months to December, compared to a year earlier.
Chief financial officer Travis Crouch said the impairment spike was due to half a dozen loans going bad in a range of different industries in different states. He said there was no pattern of concern.
Mind you, Bendigo has never been good at confronting poor lending decisions and dealing with them quickly. It is still working through the mountain of loans issued as part of the Great Southern managed investment scheme scandal a decade ago.
It now has $41.4 million in Great Southern loans which are 90 days overdue. It made a specific provision of $8 million against these loans in the half year.
Bendigo’s result took a negative hit from the higher cost of wholesale funding. But every bank has to deal with wholesale funding markets.
Higher wholesale funding cannot explain Bendigo’s weak performance in areas where it ought to have a comparative advantage including business lending and agribusiness.
Bendigo’s extensive branch network in rural areas and regional cities should be the foundation for a bespoke business lending offering that wins customers because of the quality of the relationship and the high level of service.
To be fair to Bendigo’s CEO Baker her predecessor, Mike Hirst, was in the role for 12 years and the chairman. Robert Johanson, has been on the board for 23 years. Such longevity can lead to entrenched sub-optimal practices that are hard to change quickly.
For example,BoQ has proven that a focus on specialist business segments can deliver strong profit growthdespite a 30 to 40 basis points funding disadvantage. Cash profit in the BoQ business division rose 10 per cent to $219 million in the 2018 financial year. It has lifted business loans from $11.6 billion in 2014 to $14.5 billion in 2018.
Contrast that with Bendigo’s business banking division which lost momentum in the latest half year. Its assets slumped from $12.6 billion to $11.8 billion although cash profit rose from $24 million to $36.6 million. BoQ’s vastly superior return on assets is obvious from these numbers.
Bendigo should have the country’s leading position in agribusiness outside of the big four banks. But cash profit fell from $36.9 million in December 2017 to $32 million in December 2018 while assets rose from $61 billion to $61.9 billion.
Bendigo is not the only regional bank with lacklustre performance of its own making.
Results released by BoQ last year revealed the bank had inferior systems for processing mortgages. Unfortunately, the market discovered this after the bank made a big push into the mortgage broking channel. Its systems were not good enough to provide the service necessary to win business through the broker channel.
‘Track record for taking items below-the-line’
Also, BoQ earned the ire of many analysts when it booked a whole bunch of “business as usual” costs below the line, which boosted its cash profit. It put below the line $9 million in regulatory and compliance costs, $11 million in software write-offs and $5 million in legal costs.
Jonathan Mott, senior banking analyst at UBS, summed it up well when he said: “Unfortunately BoQ has a track record for taking items below-the-line.
“Since the financial crisis BoQ has taken a net $355 million in below the-line charges across 57 items which it believed were ‘one-off’ in nature.
“This equates to 16 per cent of the profit BoQ has reported over the last decade. We believe a better indication of BoQ’s 2nd half 2018 result was that common equity tier 1 fell 11 basis points to 9.31 per cent.”
Suncorp said profit after tax in its banking operations fell by 4.7 per cent last year to $375 million largely because of a blowout in loan impairments.
Regional banks have a poor track record of earning an appropriate return on capital invested. Bendigo is forecast to have return on equity this year of 7.8 per cent and 7.6 per cent in 2020 and 2021, according to analysts at Morgan Stanley. BoQ is slightly better with forecast ROE this year of 9.1 per cent and 8.9 per cent in 2020 and 2021.
One guiding light for regional banks seeking inspiration for improved performance is AMP Bank. It lifted profit 20 per cent in the 2018 first half on the back of a 17.5 per cent increase in revenue. Its return on invested capital was 16.7 per cent.