Although the Royal Commission inquiry into financial misconduct has not been running for the last week since Commissioner Kenneth Hayne released his interim report, the fallout is still occurring as the Big Four begin to see their financial results affected by some of the revelations.
With investors already notified that they should not be expecting a bumper crop of results, these banks have already estimated slower growth internally, as three of the four prepare to post their full-year profits in the next two weeks.
Shrinking profit margins are already beginning to bite, and there are also record compensation costs to contend with. Some of the malpractice revealed by the inquiry included a series of allegations of mis-selling, including giving interest-only loans to those who could not pay them back. continuing to sell products to people who were deceased and failing to report to regulators on time.
The public reaction suggested that the banks have lost a significant amount of trust with some of their customers, with more than ever now turning to alternative lending options.
When slower credit growth has come into the picture, it has led analysts to revise their figures down and suggest a relatively gloomy outlook for these major lenders.
This does not mean that their profits will be small by any means, but compared to last year, they pale in comparison.
Commonwealth Bank posted their profit news back in August, which was at $9.2bn. When added to the $20m that analysts believe will collectively factor in by Westpac, ANZ and the National Australia Bank (NAB), this means that 2018 figures are down 7% from last year, which shows just how much the inquiry has affected the banks.
Since the inquiry put their problems into the spotlight, the Big Four have all confirmed that they have allocated a significant proportion of funds to deal with the expected high levels of compensation claims that will come their way, which are said to be in the hundreds of millions of dollars.
Funding costs have also risen across the board, and this has seen three out of the Big Four take a number of counter-actions such as out-of-cycle mortgage rate rises. However, these changes will not show up in accounts from this year.
Analysts expect lower net interest margins, which take into account banks having to pay more for funds but not charging more than the rise for the loans that they offer out themselves.
JP Morgan Analyst Andrew Triggs said that there would be a ‘subdued November reporting season for the major banks, driven by wholesale funding cost pressures impacting margins and one-off customer remediation costs impacting expenses.’
Other analysts, such as TS Lim of Bell Potter, said that dividends are unlikely to alter, but the level of growth is definitely likely to change.
Lim said: ‘In a way, the banks are becoming more like utilities. People expect very little growth in earnings over the next two to three years.’ He added: ‘Top line growth is probably just going to track GDP.’ This matches the current trend of utilities failing to boost beyond inflation-based growth. With the full picture yet to surface, just how the banks will recover from the inquiry is unknown.