ANZ CEO says banks face diminishing returns

by Bloomberg06 Oct 2016
ANZ chief executive officer Shayne Elliott said that lender returns in Australia are declining, as he became the second major bank boss to appear before a committee of politicians in Canberra.

While he conceded that last financial year’s $7.5 billion annual profit was “large,” the head of Australia’s third-biggest lender by market capitalization said on Wednesday that represented less than 1% of the company’s assets and drew attention to its sliding return on equity. The lender’s ROE has fallen from almost 20% within the past decade to a little over 12% due to competition and the costs of strengthening its balance sheet, he said.

Elliott’s comments came a day after Commonwealth Bank CEO Ian Narev told the same parliamentary committee that a strong banking system and healthy profits are necessary to ensure a prosperous economy. The hearings, which are being conducted for the first time by the same panel that routinely quizzes the head of the Reserve Bank of Australia (RBA), are an opportunity for lawmakers to raise questions on issues ranging from fees and executive pay to mortgages and the transmission of official interest-rate cuts. The heads of NAB and Westpac are scheduled to appear today.

“Returns in Australian banking are trending lower,” Elliott said. While steps to bolster balance sheets were “a sensible and pre-emptive response” there was “a cost to shareholders and customers,” he said.

Australian banks are some of the most profitable in the world, recording an average return on common equity of 15.2% in fiscal 2015, according to data compiled by Bloomberg. In the developed world, this is topped only by the big Canadian lenders. Elliott said that while the ROE of Australian banks was higher than for lenders in Europe, that is “due to the near failure of their system.” He also stated that the return for banks in Australia was “significantly less” than for other industries.

ANZ’s returns have been affected in recent years by its institutional lending business in Asia, where they have tended to be lower than in Australia.
Elliott also sought to deflect criticism of the decision not to reduce customers’ borrowing rates in sync with central bank reductions.

“While the RBA cash rate is an important ingredient in our cost of funds, it is not the only ingredient,” he said. “When the RBA changes rates, it directly impacts some but not all of our funding costs.”

Elliott defended as well the bank’s decision to reinstate a number of traders who were suspended while it investigated allegations of interest-rate rigging. While two traders were fired for violating ANZ’s code of conduct, the other traders who were stood down were reinstated after an internal review indicated they “have done nothing wrong,” Elliott said.

The Australian securities regulator is currently pursuing civil legal action against ANZ, NAB and Westpac over alleged manipulation of the bank bill swap rate, cases that the banks are defending.