It's A War Out There For Banks
Sun Herald
Sunday May 2, 2004
Huge profits mask a changing market, writes John Synnott.
``There is really only one key battleground in the next year: that's around customers winning their business, deepening our relationship with them and building market share." ANZ chief executive John McFarlane
AFTER a decade of plenty, the astronomical growth of banks has peaked and there appears to be only one way ahead down.
ANZ might have reported a record $1.4 billion half yearly profit last week, but the signs aren't good. For the foreseeable future, there will be no long-term declines in interest rates and higher rates mean lower profits. Mortgage numbers are topping out. Fee rises have reached their limit.
As well as this, the Reserve Bank wants a dramatic cut in the annual growth of household credit from its unsustainable 25 per cent rate. What will take their place as drivers for bank profits?
After several banks almost went broke in the 1990s, they have been careful to control their costs closing a third of their branches and cutting staff by 20 per cent. Banks also ``de-risked" their business during the good years, switching from the higher margin corporate loan business to personal lending, which has a relatively low profit margin, is competitive and requires volume.
``They can't go back to that corporate business as in the past, because companies went to other markets as the debt business is now much bigger in Australia," said AMP economist Shane Oliver.
It'll be war out there for the banks if they want to continue growing. Some of the battlefields include:
Bank branches
When the internet was in vogue for banking services, branch networks looked like going the way of dinosaurs. Now branches are back in fashion, with ANZ even talking about opening more.
Customers are ambivalent about branches and hate the queues. But if banks struggle to squeeze more profits out of their customers, the only way to keep them is to make them happy.
``What about more weekend or even night opening hours, like in parts of America, or just adding the convenience of closing 10 minutes later or opening 10 minutes earlier?" said Macquarie Equities senior bank analyst William Ammentorp.
This would involve a significant attitude change over the past decade, banks have cut costs by closing branches, centralising ``back office" procedures and making staff redundant, particularly from middle management.
``The low hanging fruit has been taken, there is not much more there," Ammentorp said.
But don't think the change of heart on branches signals the end of bank efficiency drives. They have cut margins or cost-to-income ratios from the middle 60s down to the 50s. ANZ boasts a ratio of 46:1.
HSBC is driving to get to 28:1, says Grant Halverson of consultants McLean Roche. ``If the big players can bring this scale to our market it will make a competitive difference," he said.
Cross selling
Investment products were going to be the way of the future as banks surfed alongside baby boomers heading into retirement. But the verdict so far on the result of expensive big bank takeovers of the major investment houses has been disappointing (think CBA and Colonial First State, Westpac with BT and Rothschild, NAB with MLC and ANZ's deal with ING).
It is not turning out to be a win-win combination with new investment fund flows not coming the banks' way. But it is early days, and banks such as the CBA are pushing on hard with the strategy to ``deepen" relationships with customers.
The less-than-stellar success of cross-selling ``wealth management" products has been blamed on a clash of cultures banks are risk averse, investment houses are selling risk.
``There's a tension in the evolution of the banking industry banks are not popular but they are trusted," Professor Ian Harper of the Melbourne Business School said. ``There is a danger of the tail wagging the dog. People would rather banks be bastards but honest ones."
Regional banks
The small guys are threatening to blow the big bad banks over with a better deal in customer service.
Bendigo Bank is the fastest-growing financial services business in Australia. The Bank of Queensland (BoQ) plans to open 100 branches in NSW and Victoria by 2006. Regional and non-bank mortgage originators took the biggest and most profitable mortgages last year, says Macquarie Equities.
BoQ has opened 40 branches in 18 months, mainly in regional Queensland, but, as a sign of the strength of the majors, it is taking 2 to 2.5 per cent of new lending.
Small banks are nimbler and quicker than the big boys, says Perth-based BankWest. It is growing organically, backed by Halifax Bank of Scotland a sign that banks globally are getting bigger and want to come to Australia.
And these regional and community banks are nicking good bank staff from the majors.
``Finally it is all about relationships with the customers and with a small bank you can do that," said BankWest's business solutions boss Jack Dykes. Credit unions are also in there with other financial institutions circling the big banks, looking for weak spots.
``There is really only one key battleground in the next year: that's around customers winning their business, deepening our relationship with them and building market share," ANZ chief executive John McFarlane told The Sun-Herald.
``We want to make it easier for customers to do business with us. Of course that's easy to say but it's been difficult for banks to do."
BoQ chief executive David Liddy , a 33-year veteran of Westpac, agrees the new battleground is over service.
``Banks are about people," he says. ``The trend worldwide is to bring back branches, by bringing back real bank managers, not ones that are there only for two weeks but people who are part of the community."
In some ways the big banks don't mind the existence of smaller players because they cater for low income customers whom the banks are accused of abandoning.
Small business
An unseemly fight between lenders is brewing for the business of small and medium-sized enterprises (SMEs).
As the housing market slows down, non-bank mortgage providers will look to ways to keep up their rates of growth. One target will be the 80 per cent of loans where the family home or other property is put up as security by small business.
Last week, The Sun-Herald reported the fight between financial institutions over franchise lending. Potential franchisees can now borrow against the value of the franchise they are buying, rather than against their home.
``The most intense competition seems to be in small business lending," Ammentorp said. ``We would not be surprised to see this market end up like mortgages very competitive, multiple products and providers, and thinner pricing."
Fees and charges
Banks have achieved double-digit fee increases for the past five years from each major customer group: consumers, SMEs and large corporations. ``The pressure is on, especially when overseas markets are seeing fees decline," Ammentorp said.
It's rare to pay an annual fee on a credit card in Britain look at the Virgin credit card. US banks do not charge ATM fees when you withdraw money from another bank's machine. ING Direct-style high interest, no fee, no catches deposit accounts have shown banks how successful a low-cost model can be.
Rising interest rates attract people to savings banks, so expect the battle for deposits to pick up in the next few years.
The decline in profit margins on interest rates paid by banks was offset by the rise in fees. NAB recently put a new fee on business payroll transactions.
``If there are other institutions ready to offer a better deal, there will be no shortage of dissatisfied customers," said Catherine Wolthuizen of the Australian Consumers' Association.
BUT MARKET MAINTAINS INTEREST
INVESTORS see banks as a less compelling buy than they have been, but analysts believe they will continue to pay healthy 5 to 6 per cent dividends plus show a similar growth in share price, as they did in 2003.
There are risks, of course. If the housing cycle turns down savagely, bank profitability will go backwards for a while.
IML portfolio manager Monik Kotecha says rising interest rates hurt banks, but not at the start of the upswing.
``We believe all the major Australian banks are currently attractively priced and represent very good sound long-term value," he said. ``They have strong market positions in a concentrated industry, they have recurring earnings streams and have the capacity to grow their long-term earnings as the economy grows and credit demand grows."
© 2004 Sun Herald