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Banks tipped to face ‘bollocking’ on lending from royal commission

Banks face a “public bollocking” when the royal commission into financial services next month puts lending to households under the microscope, which could deter them from lifting home loan rates, a leading analyst says.

Analysts said the commission‘s decision to scrutinise home loans, car loans and credit cards first could highlight problems in this area of banking including irresponsible lending and conflicted remuneration.

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Banking royal commission launched

In his opening statement, Commissioner Kenneth Hayne notes several banks will fail to meet a deadline of delivering a list of their misconduct.

Counsel assisting the commission, Rowena Orr, QC, said on Monday the next round of hearings would focus on unfair and dishonest practices in relation to residential mortgages, credit cards and car loans. Mortgages, in particular, make up a hefty share of the banking sector’s assets, in turn driving profits.

Commissioner Kenneth Hayne on Monday also criticised several of the major banks for submitting incomplete documents setting out instances of past misconduct, which he requested before Christmas.

CLSA’s veteran banking analyst, Brian Johnson, said Commissioner Hayne’s tone towards the banks for failing to meet deadlines was “ominous”, and the commissioner could be “sowing the se to prolong this inquiry”.

In a note to investor clients, Mr Johnson predicted extensive negative publicity about the banks when the hearings took place.

“The next public hearing is in about a month’s time and will focus on housing lending, car lending and cards – that sounds like a looming public bollocking the banks will get with personal stories of their failure to follow responsible lending,” Mr Johnson wrote.

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One implication of this would be “no further repricing of home loans”, suggesting a contraction in banks’ profit margins.

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Commissioner Kenneth Hayne’s tone towards banks was ‘ominous’, says CLSA analyst Brian Johnson. Photo: Eddie Jim

Mr Johnson added the royal commission “will not help sentiment towards house prices”, especially if the banking regulator imposed any extra curbs on home lending.

It is not yet known when or where the next round of royal commission hearings will take place, or which banks they may focus on. The overarching scope of the inquiry is to probe “misconduct” in the industry and other behaviour that falls short of community expectations.

Velocity Trade banking analyst Brett Le Mesurier said key issues the royal commission might look at in the home loan market included the role of mortgage brokers, and loan pricing.

“You never know what’s going to come out of it. But the way the world works is that banks incentivise mortgage brokers to send them business, and mortgage brokers have a conflict because they get paid different rates by different lenders,” Mr Le Mesurier said.

Another issue that could come up was mortgage pricing and the tendency for banks’ home loan interest rates to move in line with each other.

Despite the similar prices charged by banks, Mr Le Mesurier said this reflected competition, adding “the simple fact is they don’t collude”.

Morningtar’s head of banking research, David Ellis, noted that most scrutiny of bank misconduct had previously centred on financial advice and life insurance, as opposed to retail banking.

However, he said that given the concerns about the high level of housing debt, and bank lending standards, focusing on mortgage lending could make sense for the commission.

“Obviously home loans are the biggest asset of the four major banks and the housing market is such a big and crucial part of the financial system, so in that regard it’s probably not that surprising,” he said.

Bell Potter analyst TS Lim said mortgage lending was “very profitable” for banks, but argued there was “sufficient” competition in this part of the market.

“They’ve already cut back on a lot of lending and smaller lenders are actually jumping into the space,” he said.

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