Playing the Piper

Ord Minnett has reviewed its FY19 remediation cost forecasts for ANZ Banking Group (ANZ, Accumulate), Commonwealth Bank (CBA, Hold) and National Australia Bank (NAB, Accumulate) and Westpac Banking Corporation (WBC, Hold).

 

As a consequence of the Royal Commission, banks are increasingly putting customer remediation at front of mind and applying higher standards than in previous years. As an example, NAB acting CEO Phil Chronican indicated this week that the bank would soon have 500 people working on its remediation efforts.

 

We note there are two main areas of financial advice remediation:

 

  • Inappropriate or substandard advice – This covers advice from both salaried advisers and aligned dealer groups (ADGs), and has required the banks to assess the suitability of the advice that customers have received. Where a customer has received substandard advice, the banks have been required to compensate customers in line with a methodology agreed with the Australian Securities and Investments Commission.
  • Fees for no service – Similarly, this covers both salaried advisers and ADGs. This has required the banks to confirm they had consent to charge fees. In instances where they didn’t, or where there is no evidence of advice having been provided, they have been required to reimburse customers, including interest.

 

The banks have also had to remediate their IT systems and internal processes to address the underlying deficiencies that allowed these issues to go undetected. We understand these work programs will continue to focus on improving the banks’ reporting and compliance capabilities.

 

Estimating customer remediation costs is inherently difficult, but we believe our updated numbers better reflect the current environment, expectations of regulators that banks should be on the front foot, and the desire of boards of directors to deal with issues in a timely manner.

We have increased our FY19 remediation cost estimates by $125m for ANZ and CBA, and $300m for NAB, having earlier lifted our allowance for Westpac’s remediation costs by $450m. Most of the charges relate to financial advice remediation, although a component is for other banking issues. The changes have seen our FY19 net profit forecasts fall by 1% for ANZ, 1% for CBA, 3% for NAB and 5.6% for Westpac.

 

With the Reserve Bank of New Zealand’s (RBNZ) capital proposals – which are still in draft form – looming over the sector and one-off costs continuing to be booked, we have also adjusted our capital management assumptions. We now assume no bank conducts capital management in the second half of FY19. That said, we have yet to fully factor a New Zealand capital increase scenario into our forecasts – including the likely loan and deposit repricing that would go with it.

 

For NAB we have cut our first-half dividend forecast to 90c from 99c per share to reflect the RBNZ capital proposals, one-off costs and the lack of surplus franking credits. Despite this, based on our revised numbers NAB continues to trade on an FY19 dividend yield of 7.2%, ahead of the other major banks, and it remains our key sector preference.

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