Here’s What Analysts Are Saying About the Australian Bank Inquiry

(Bloomberg) -- Australian banks face a tougher future with a more empowered regulator after the government said it would act on almost all the recommendations made in the final report of an inquiry into the financial sector that was published Monday.

Still, bank and financial services shares soared as the more extreme proposals of forced break ups or tighter lending rules failed to materialize in the Royal Commission report.

Here’s What Analysts Are Saying About the Australian Bank Inquiry

Westpac Banking Corp. climbed as much as 6.7 percent, its largest gain since May 2012 and AMP Ltd. jumped almost 10 percent. Australia & New Zealand Banking Group Ltd. rose 5.4 percent, while National Australia Bank Ltd., whose Chief Executive Office Andrew Thorburn and Chairman Ken Henry got a special mention in the report, rose as much as 4 percent. The nation’s benchmark equity index jumped 1.5 percent, poised for its highest rally since Oct. 11.

Here’s what analysts and investors said:

UBS

  • Inquiry falls short of market expectations, was disappointing
  • “We do not believe that any of the 76 recommendations by themselves will have a material financial impact on the banks,” analysts led by Jonathan Mott write in Feb. 4 note. “The soft recommendations of the Royal Commission Final Report is a clear win for the banks”
  • Remain cautious on banks but says this is a large hurdle cleared; Risk of the credit squeeze becoming a crunch is real and rising

Saxo Capital Markets

  • “Shareholders might be breathing a sigh of relief because the royal commission report is not as stringent as people might have expected,” Australian market strategist Eleanor Creagh said in a phone interview Monday. “I don’t think that the royal commission did anywhere near enough to cover what’s needed there.”
  • “Banks will be breathing a sigh of relief generally and we’re probably likely to see a bit of a relief rally in the financial services sector tomorrow,” she added. “I would be taking any relief rally that we see off the back of this Royal Commission final report with a pinch of salt”

Morgan Stanley

  • Final report “incrementally positive’’ for major banks as no unexpected, material or adverse outcomes
  • Inquiry didn’t propose responsible lending laws or major structural change; Recommendations may create revenue headwinds and add to costs
  • Removing trailing commissions is a slight positive for banks
  • “We expect refunds and remediation to be a recurring cost given the RC identified cases of criminal or civil misconduct and the banks want to restore community trust,” analysts led by Richard Wiles write in Feb. 4 note; See more than A$2.5b further charges by end FY20

Deutsche Bank

  • Nothing radical, as expected, some may see recommendations as “too docile,” analysts led by Matthew Wilson write in Feb. 4 report
  • Worst fears around banning vertical integration haven’t occurred; Trailing commissions, insurance product sale commissions super trustee conflict recommendations are all positive steps
  • Business as usual for general insurers; Advice and life units may face commission compression but business models can remain intact

Citi

  • Inquiry delivered a ‘pragmatic’ report which didn’t advocate a radical industry overhaul; Existing laws and regulatory structures kept in place
  • Banks, excluding Westpac, referred to Australian securities regulator to face civil prosecution for fee-for-no-service; Likely to face ‘manageable’ fines in time
  • “The final report has delivered differing implications for each of the banks,” analysts led by Brendan Sproules write in Feb. 4 note. “We expect the negative sentiment that has engulfed the sector to wane over 2019, presenting an opportunity for investors.”

Credit Suisse

  • Final report less negative than market expectations, contains little in way of surprises
  • Removal of broker trail commissions will benefit bank sector profitability in lien with the upfront fee
  • Expect brief relief rally; Seen as short lived amid weak consumer lending, slow top-line growth and election uncertainty
  • “We think CBA and WBC benefit the most given mortgage broker remuneration recommendations and lack of structural separation,” analysts wrote in Feb. 5 note. “NAB, on the other hand, is a relative loser given commentary around lack of confidence that issues have yet to be fully addressed.”

Bell Potter

  • “No surprises they focused on the role of intermediaries and also they recommended changes in trails and up-fronts, which in the long run I think was what was expected,” analyst TS Lim said in a phone interview Monday. “In a way that’s probably neutral for the banks because it will drive customers back to the branch network”
  • “Overall at least they won’t be dismantling the banks’ vertically integrated model at this stage”

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