SYDNEY: Investors are turning against Australia's big banks as earnings tumble, growth plans are abandoned, and fee income cut in the fallout from a powerful financial sector misconduct inquiry and more challenging economic conditions.
More than 31 growth-oriented institutional funds, which have long relied on the banks to deliver strong and predictable earnings, have closed their positions this year, report agencies.A further 146 growth funds have trimmed their holdings, helping push share prices of the so-called "Big Four" down between 14 to 20 percent lower in the past year, a Reuters analysis of stock portfolios has found.
Veteran Australian investor Geoff Wilson, chairman of Wilson Funds Management, told Reuters the market was yet to digest the full impact of the headwinds facing the sector.
"One thing we do know is that markets over-react," Wilson said. "I don't think they've over-reacted yet on the banks."
The dour outlook will challenge the reputation of some of Australia's biggest financial institutions - Commonwealth Bank , Westpac Banking Corp , Australia and New Zealand Banking Group and National Australia Bank - as world leaders in profitability.
The four retail banks yielded close to 20 percent return on equity over the last decade, Refinitiv Eikon data shows. That has shrunk to 12 percent this year.Analysts polled by Reuters expect ANZ, the third largest lender by market capitalization to report a 15 percent fall in cash earnings for the second half of the fiscal year to AUS$2.93 billion (US$2.09 billion) when it releases results on Oct. 31, driven by higher costs and lower lending volumes.
Annual cash earnings at NAB, the fourth largest, are similarly anticipated to fall by about 12 percent when it reports on Nov. 1.
The Royal Commission, as the public investigation into financial sector misconduct is called, has already accelerated a tightening of lending standards, and is likely to trigger structural change that would add pressure to the money-making models of the banks.
The powerful inquiry has drawn a direct causality line between the bank's high profitability and the widespread misconduct exposed at the banks and other large, vertically integrated financial firms over the last seven months.
Among the revelations, the inquiry found banks lending without doing basic checks to ensure customers could afford loans, uncovered how they have taken fees from customers' accounts without providing them with services, and exposed lending referral programs that incentivized staff to commit fraud.
The banks have apologized and are spending over AUS$6 billion in legal and compliance costs, including remediating customers affected by their poor behavior, according to Shaw and Partners analysis.