The Royal Commission into misconduct in the banking, superannuation and financial services industry has now concluded.
At first glance, we do not find any of the recommendations relating to the major banks to be overly concerning. From this perspective, the extent of regulatory risk factored into major bank share prices looks overdone.
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Westpac (WBC) remains our preferred major bank.
We do not anticipate further tightening in lending standards. In fact, we expect an easing in lending standards particularly as both sides of politics appear intent on ensuring the free flow of credit.
We also imagine the RBA would prefer to see credit flowing more freely than it is currently.
We are continuing to go through cases which have been referred by Hayne to regulators for potential breaches of the law and what this means in terms of potential penalties for the institutions involved.
Preliminary view in more detail
- We do not anticipate further tightening in lending standards. The definition of 'responsible lending' remains unchanged and it has been recommended that the NCCP Act should not be amended to alter the obligation to assess suitability. Furthermore, the use of statistical benchmarks, such as the Household Expenditure Measure (HEM), has not been prohibited - on this front it has been said: "...the HEM can have some utility when assessing serviceability - that is to say, in assessing whether a particular consumer is likely to experience substantial hardship as a result of meeting their obligation to repay a line of credit...".
- SME lending: as we expected, there are no significant changes on this front in our view. It has been recommended by Hayne that the NCCP Act should not be amended to extend its operation to lending to small businesses.
- On vertical integration, our read at this stage is that it has not been recommended that wealth management businesses be separated from banking businesses. This is a positive for Westpac which continues to retain a substantial wealth management business.
- Financial advice: at first glance, it appears that most of the recommendations on this front have generally already been addressed by the major banks.
- Insurance: at first glance, we do not find any of the recommendations on this front to be overly concerning. It should also be noted that NAB, ANZ and CBA have or are in the process of divesting their life insurance businesses.
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