MENU

Why conduct risks could clobber the big banks

Putting aside bad debt issues and higher capital requirements for the time being, international credit rating agency Fitch has identified yet another risk that shareholders in Australia & New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) need to contend with.

That issue is ‘conduct risk’ and it refers to the fines, class actions and increased regulatory oversight that comes as a result of constant bank misdemeanours. As reported by Business Insider, Fitch claimed that while the fines were unlikely to be material to the banks, reputational damage and a stronger regulatory or compliance culture should not be overlooked.

Prime Minister Malcolm Turnbull weighed into the debate recently with some remarks on bank culture at Westpac’s 199th birthday dinner. This could be a sign that the political will to make regulatory changes is building, and it could be bad news for the banks. Chief regulator Greg Medcraft has previously commented that he was unwilling to regulate bank culture, but with the banks continuing to bury their head in the sand and claim there’s no culture problem, such a regulatory approach may be forced upon him.

Such regulation, if it comes, will be the proverbial ‘blunt object’ and like recent increases to capital requirements it’s unlikely to be good for bank profits. Ratings agency Fitch has come extraordinarily late to the party however, with multiple banking misdemeanours and scandals going back to at least 2012. Commonwealth Bank of Australia (ASX: CBA) was behind that one, and played a dominant part in the collapse of Storm Financial back in 2009. 2013 saw a class action launched against ANZ, 2014/2015 saw the beginning of an ASIC investigation into the interest rate-rigging scandal. While National Australia Bank Ltd. (ASX: NAB) and Westpac were fined in 2014 for misleading consumers. Commonwealth Bank also landed in hot water over a Four Corners episode in 2014 about its deceptive financial planners.

This is only an abridged list of the conduct issues that have cropped up in recent years, and just a few weeks ago Commonwealth Bank made headlines again for its unscrupulous practices in denying life insurance customers their payouts.

Fortunately for all of us, banks are improving their culture. Right?  Right.

Foolish takeaway

Despite their terrible record, the banks have shown no signs of changing. Perhaps even more unfortunate is that Australian customers are incredibly loyal to their banks, loyalty which costs them billions of dollars every year that they could save by switching providers.

As a result, the big 4 banks monopoly is intact, and despite ‘rising conduct risks’ – which have been rising for at least five years, never mind Fitch’s recent note – present fines and class actions aren’t large enough to have a significant impact on bank profitability.

Forget about the banks! 

They're not an ethical investment, and The Motley Fool has a stack of better investment ideas anyway. You see, The Motley Fool's renowned dividend investing guru recently revealed his newest dividend buy recommendation and a short list of 3 Best Dividend Buys Now.

Unfortunately if you're reading this message right now, you're not on the list to uncover their names before they potentially go gangbusters. Simply click here to learn more about these shares.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.