Boom days are over for banks: Kelly

THE days of Australian banks posting returns on equity of 20 per cent or more are long gone, says Westpac chief executive Gail Kelly.

By InvestSMART · 29 Nov 2012

By InvestSMART ·
29 Nov 2012

Comments

THE days of Australian banks posting returns on equity of 20 per cent or more are long gone, says Westpac chief executive Gail Kelly.

While it is still desirable for banks to grow their profits, aiming for returns on shareholder funds of 20 per cent or higher has not been sensible since the global financial crisis, she says.

"Those days of the 23 to 22 per cent . . . I think those days are gone," Mrs Kelly said.

She said Westpac's target to maintain a return on equity rate of 15 per cent was still appropriate, as long as good risk-management strategies were implemented.

"I think there are opportunities for growth and it is important that in a sensible managed way we go after those opportunities for growth," she told a business forum in Sydney.

Speaking at the same event, Bendigo and Adelaide Bank managing director Mike Hirst said banks held a privileged position in the economy and it was inappropriate for them to chase risky levels of return.

"The reality is if we're asking for 20 per cent returns from our banks, when the risk rate is 6 or 7 per cent, that is a fairly large risk and I'm not sure there should be that risk," he told the forum.

Australian Prudential Regulation Authority chairman John Laker said he had no problem with banks making returns in the mid-teens but agreed that anything higher than 20 per cent was no longer appropriate. "I think the message is getting through," he said. "Part of it is educating investors that the good days are behind us."

The comments came as a Coalition-dominated Senate inquiry called for a new code of conduct to give small business borrowers more protection in their dealings with banks.

The inquiry was launched partly as a response to complaints from small business owners who were put into receivership following Commonwealth Bank's takeover of Bankwest at the height of the global financial crisis.

While the inquiry did not pass judgment on whether the banks had acted inappropriately, it said there had been a large number of "disturbingly similar" cases involving CommBank and Bankwest.

Acknowledging the major changes in funding costs facing banks, the senators also called for a sweeping inquiry into the financial system - a proposal rejected by the government. "While Australia avoided the worst of the GFC, this should not be allowed to result in complacency about the structure and performance of our own financial system," the committee's chairman, Liberal senator David Bushby, said.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

Why are Australian banks no longer posting 20%+ returns on equity?

Westpac chief executive Gail Kelly and other industry figures say the high-return 'boom days' before the global financial crisis are over. Since the GFC, funding costs and regulatory expectations changed, making sustained returns above 20% unsuitable. The message from regulators and bank leaders is that more modest, better-managed returns are now the norm.

What return on equity target is Westpac aiming for and why does it matter to investors?

Westpac has targeted maintaining a return on equity of around 15%. For everyday investors, that means expecting mid-teens returns rather than the very high double-digit returns seen pre-GFC — provided banks continue sensible risk management and pursue growth carefully.

Is it risky for banks to chase very high returns like 20%?

Yes. Bendigo and Adelaide Bank’s managing director Mike Hirst warned that chasing 20% returns when the underlying risk-free or risk rates are much lower (around 6–7%) represents materially higher risk. Regulators and bank leaders argue it’s inappropriate for banks to take on that level of risk given their role in the economy.

How should investors adjust expectations for bank profitability going forward?

Investors should temper expectations and recognise that mid‑teens returns are considered acceptable by regulators and many bank executives. John Laker of APRA has said returns in the mid‑teens are fine, but returns above 20% are no longer appropriate — so plan portfolios with more moderate bank profit outlooks in mind.

What was the Senate inquiry calling for regarding small business borrowers and banks?

A Coalition-dominated Senate inquiry called for a new code of conduct to give small business borrowers more protection when dealing with banks. The move was driven in part by complaints from small-business owners who were placed into receivership following Commonwealth Bank’s takeover of Bankwest during the GFC period.

Did the Senate inquiry say banks acted improperly in the Bankwest cases?

The inquiry did not formally find that the banks acted improperly, but it noted a large number of 'disturbingly similar' cases involving Commonwealth Bank and Bankwest, prompting calls for better protections for small borrowers.

Are changes in banks’ funding costs prompting a broader look at the financial system?

Yes — senators acknowledged significant changes in funding costs facing banks and some called for a sweeping inquiry into the financial system. However, that broader proposal was rejected by the government according to the article.

What do regulators like APRA think is an appropriate level of bank returns?

APRA chairman John Laker indicated he has no problem with banks earning returns in the mid‑teens, but agreed that returns above 20% are no longer appropriate. He also said part of the task is educating investors that the very high-return era is behind us.