Suddenly the banking industry is becoming a lot more 'exciting'. But I am not sure the enormous army of bank shareholders, who are there for the dividend yield, will welcome that excitement.
In simple terms banks are going to face a lot more competition as technology opens the market but they are also starting to squabble among themselves because, outside housing, the market is not growing. And even in dwellings the big Chinese banks are eating the locals’ lunch (The tidal wave of Asian money rushing into Australia’s inner cities, June 16).
And at the same time our big four banks are being tempted to break all their GFC resolutions and lift their overseas borrowing to reduce their interest costs but increase their vulnerability to a future crisis.
Let’s start with bank's market-share squabbling. It takes place on a number of fronts but none is more deadly that the National Australia Bank/Australia New Zealand Banking Group battle. In the global financial crisis NAB lifted its share of the business market and one of the losers was ANZ. In more recent times NAB has taken a much more cautious outlook for many parts of the Australian business market than ANZ, which has been ready to fund NAB clients that have been knocked back for additional or continuing credit by NAB managers.
ANZ even promotes its more liberal business lending policy on freeway advertisements and other prominent places. NAB has lost about half the market share it gained in the global financial crisis and the new chief executive, Andrew Thorburn, will have to decide whether to change business lending criteria and match ANZ, or lose more market share. It will be a huge call. In any market that is not growing you are going to see decisions like that on many fronts.
In banking terms that is only one of many decisions about risk. Another area where banks can lift their risk exposure to increase returns is overseas borrowing. Overseas interest rates are lower than local deposit rates. But every extra dollar banks borrow offshore lifts their risk profile in any future crunch. Without quick action from the Reserve Bank and government in the global financial crisis we could have lost a bank or two because they had borrowed too much overseas.
And risk is also increasing on other fronts because, under pressure from shareholders, banks are paying out too much of their profits in dividends and not investing enough in the banking business at a time when massive investment is required because of the rapidly changing market. High bank profits and under-investment in new technology markets is acting like a magnet to draw in new rivals.
And so we are going to see Coles enter the banking market with much greater use of the mobile phone. When the compulsory rules on the use of credit card pin numbers come into operation in August it will be a nightmare for hotels, bars and accommodation that currently use their ability to take money out of cards to secure payment. New entrants like Clipp are suddenly moving into the space to help. A founder of Seek, Paul Bassett, and Atlassian’s Mike Cannon-Brookes reckon there is big money to be made using new technologies to attack what they believe are profit-fat banks.
All these events will happen gradually but in a year or two we will look back and realise how banking is being transformed, and banks’ high dividend policies have left them vulnerable.