The Royal Commission impact on bank dividends
For years the substantial dividends paid by the banks have been money for jam for SMSFs, but are we now beginning to see a changing tide?
SMSF trustees have some hard thinking to do. For years, the big four have delivered them capital growth and fully franked dividends. While analysts (some self-interested) have tut-tutted about their portfolios’ heavy concentration on the banks, for trustees it has been money for jam.
Sure, there have some corrections along the way. In 2008, the GFC took some shine off their performance. But not for long. Today, it’s the Royal Commission that’s putting the banks’ share (and other financial services companies) prices under pressure, as evidence about their malfeasance (especially their wealth arms) is laid bare before Justice Kenneth Hayne.
It’s not just that the banks’ very dirty linen is getting a public airing. They will then have to negotiate with Canberra about the (almost inevitable) legislative changes, and, irrespective of who’s in power, they can expect – and will get – little sympathy. Even the Coalition has finally realised there’s no votes in defending the banks after being dragged, kicking and screaming, to setting up this Royal Commission.
SMSF trustees, so long the beneficiary of the banks’ dividend policy, might still see the Royal Commission as another hiccup, and that once the “shock, horror” headlines emanating from the inquiry abate, it will be business as usual.
I beg to differ – and not just because of the Royal Commission, although it’s likely to prove a seminal event in the evolution of this country’s financial services. Because what’s unfolding at this Royal Commission beneath the banner headlines is a fundamental question – where do the bank boards’ prime responsibility lay?
Up to now, I would argue their focus has been on shareholders; maximise returns to investors (including that army of SMSF trustees), and bank directors and senior management believed they were doing their jobs. Lip service was paid to other stakeholders, customers, staff and even the wider community (think sport sponsorship), but shareholders held centre stage.
In the aftermath of the Royal Commission, and the legislative framework that emerges from it, I suspect banks will be required to pay much more than lip service to other stakeholders. This will particularly apply to customers. Banks are already recognising this reality; it’s one factor behind them jettisoning their wealth arms – a major source of consumer angst. The vertically integrated financial model is simply too conflict-laden.
But even as they return to more traditional banking practices, life will not be the same. Much more will be demanded of them, with the regulators, also unlikely to come out of this inquiry unscathed, adopting a much tougher line.
It’s not for nothing that ASIC Chair James Shipton, in a recent speech to the Financial Services Council, spoke of a “trust deficit” afflicting the financial sector. This was also highlighted in a recent Deloitte report that showed 32 per cent of customers trust in the financial services sector has deteriorated over the past year.
There will be more compliance, and that inevitably brings with it less risk averse cultures, higher costs and tighter margins. And this will flow into smaller profits and lower payouts. It won’t be Armageddon, but I suspect it will mean slower growth and small smaller dividend cheques from the banks.
That’s one pressure point for banks. To ensure SMSF trustees continue to have more sleepless nights, there’s another; banks must come to terms with the technological revolution. The disruption that’s turned other industries on their heads won’t bypass the banks; indeed, they will be in the eye of the storm.
How will bank directors respond? Will they listen to the smart, young executive who understands what technology is doing to the industry and asks for $500 million, $1 billion to invest? Will they be prepared to tell shareholders (especially those cash hungry SMSF trustees) that dividends may have to be trimmed for the capital investment to remain relevant?
At the same time a new breed of banks is emerging – the neo-banks. APRA has granted newcomer Volt a restricted Authorised Deposit-Taking Institution (ADI) licence, and it aims to secure an unrestricted licence by the end of the year and hang out its shingle for business. Or non-banks, operating under a different regulatory regime, which still function like banks by offering to “store” wealth for its retail customers.
If Europe is any guide, this digital-only bank (and the others following in its footsteps) will disrupt the market. And it’s key point of difference. Yes, you guessed it. The big banks have lost consumer trust and relevance, and the “Volts” of the world will be customer-centric as they chase business in the traditional markets of personal loans, mortgages, credit cards and small business banking products.
Growing competition could not come at a worse time for banks as they confront consumer hostility – without any friends in Canberra. Add tougher regulation and regulators, higher capital requirements and a slowing housing market, and the days of SMSFs enjoying the ride on the banks’ back might well be over. At the very least, trustees should be asking the question.
George Lucas, managing director, Raiz Invest
