Banks likely to lose billions following Royal Commission probe

But tighter lending standards will likely open opportunities for other banks, says industry analyst

Banks likely to lose billions following Royal Commission probe

The banking industry’s revenue is expected to take a big hit following the Royal Commission’s misconduct probe, according to research from IBISWorld. Banks are expected to face higher capital requirements, tighter regulations, and steep costs to adopt and implement measures that will address the issues raised by the inquiry, according to the research firm.

IBISWorld expects industry revenue to decline at an annualised 1.4% over the five years through 2017 to 2018, to $148.2bn. This is down from $159.0bn in 2012-13.

APRA “has already announced its intention to raise capital benchmarks to unquestionably strong levels, with banks expected to meet these levels by 1 January 2020. This already represents a significant cost to the major banks and their shareholders”, said IBISWorld senior industry analyst Tommy Wu in a statement.

APRA slapped an extra $1bn capital charge on the Commonwealth Bank following the Prudential Inquiry into the bank. The charge “potentially puts CBA in the weakest capital position of the major banks”.

Replicate commissions and tighten lending
IBISWorld said the Royal Commission highlighted the misalignment in the remuneration structure of mortgage products, particularly on how the up-front commissions of brokers were maximised when customers get larger mortgages and repay them over longer periods of time.  

Wu expects that future commissions could replicate the approach in life insurance remuneration, where regulators have reduced and capped ongoing and up-front commissions. “This will be the case if financial institutions remain vertically integrated, as highlighted by Westpac revising its remuneration model,” he said.

The industry analyst also said consumers and businesses can expect to see tighter lending standards – and this will likely open opportunities for other banks and non-bank lenders. “Banks will need to assess the impact of higher regulatory costs on bottom lines, and balance compliance costs with returns to shareholders.”

Back to basics
Banks could potentially become smaller, move away from other services, and revert to basics when it comes to the core business of lending, according to Wu. Several banks have already stripped their wealth management system because of greater compliance and increased scrutiny, and as investment returns weakened.

“This move away from providing advice and scaling back operations will help reduce risk for the major banks, minimising the potential for further significant regulatory trouble,” Wu said.

The next round of hearings is set for 21 May to 2 June. The four major banks, including the Bank of Queensland and Suncorp, will discuss issues on small and medium business lending.