REFILE-Boring no longer beautiful as Australia’s banks face ‘super’ shake-up


Wed Jul 31, 2013 7:38pm EDT

By Jackie Range and Jane Wardell

SYDNEY Aug 1 (Reuters) – The “boring is beautiful” model
that made Australia’s banks among the most profitable in the
world is in jeopardy, as government-backed growth in pension
funds is set to drain the money pool available for old-fashioned
retail deposits.

Gradual increases to compulsory contributions to retirement
funds will shake up Australia’s A$5 trillion ($4.53 trillion)
financial industry by forcing banks to compete harder for
deposits and explore riskier services well outside their comfort
zone.

“There’s going to be a big change to how funds flow into the
economy,” said Rodney Maddock, an economics professor at Monash
University. “The flow of cheap bank deposits is going to slow
down and banks are going to become less profitable unless they
can pass on the more expensive borrowing costs.”

Australia’s “Big Four” banks – Australia and New Zealand
Banking Group Ltd, Commonwealth Bank of Australia
, National Australia Bank Ltd and Westpac
Banking Corp – are due to report another series of
bumper profits in coming weeks after posting a record combined
A$13.2 billion cash profit in the first half.

The quartet has been paying out stellar dividends to happy
shareholders in recent years, attracting yield hunters from
around the globe and overtaking miners as the power behind
Australia’s upwardly mobile stock exchange.

Unlike their foreign peers which are much more reliant on
wealth-management divisions for profit, Australian banks have
been driven to a large degree by household bank deposits. More
than 40 percent of Commonwealth’s cash earnings in the 2012
financial year came from retail banking services.

But under rules being phased in by the government,
contributions to compulsory retirement funds, called
superannuation or just “super” in Australia, will increase from
9.25 percent of salary income to 12 percent from July 2019.

NAB forecasts the country’s superannuation pool will more
than double from around A$1.58 trillion currently to A$3.4
trillion by 2022, bigger than the current GDP of France.

To be sure, the expansion of superannuation is not entirely
negative for the banks. The Big Four are expected to participate
in the sector’s growth through their own wealth businesses,
while benefiting from the pension funds’ appetite for their
fixed-interest securities.

Each of the big banks already offers pensions products, but
they face stiff competition from dedicated retirement fund
managers and a host of foreign players including MFS Investment
Management, William Blair Company and Henderson Global
Investors Ltd.

Australia is “a bit of a honey pot for those global fund
managers who are looking for growth,” said Lachlan Colquhoun,
head of markets analysis at business banking research firm East
Partners in Sydney.

Analysts say banks will need to offer additional services to
feed growth – potentially taking on a larger
institutional-banking or wealth-management role, encompassing
superannuation.

“They are obviously trying to sell more of their
wealth-management products through the existing banking
network,” said Victor German, a banking analyst at Nomura in
Sydney.

In a further sign of this trend, NAB last week announced
veteran investment banker Craig Drummond as its next chief of
finance and strategy.

“Certainly that institutional segment is an area where the
NAB has traditionally not been strong, so they are shoring up
their capabilities in an area of weakness and doing something
about it by hiring Drummond who is a very well-credentialed
investment banker,” said Colquhoun.

RISE OF SUPER

Pension funds are likely to step into financial assets such
as home loans, another traditional preserve of the big banks,
and invest more in infrastructure projects as they seek returns
for investors in a highly competitive market.

“The increasing size of super funds and the reduction in the
funding advantage for banks means we’ll likely see a system
where natural long-term lenders such as super funds team up with
long-term borrowers such as mortgagees and infrastructure
funds,” said Monash University’s Maddock.

The banks are also facing competition from, and scrambling
to get a foothold in, self-managed superannuation funds. These
independent retirement plans – as opposed to those run through
mutual funds – account for 31.5 percent of the current
superannuation pool, according to the Australian Prudential
Regulation Authority.

Cross-selling wealth-management products is important to
banks, even if the jury is out on how successful they have been
at it, analysts said.

There is also some duplication of offerings. Westpac
provides services for self-managed super funds, while BT,
Westpac’s wealth-management arm, also offers advice and services
to self-managed super funds.

Westpac said that while products were separately branded,
they were ultimately managed together with BT. Still, that
leaves a concern that the two businesses may be competing for
the same customer.

“Are they cannibalising each other or are they working in
concert?” said Colquhoun.

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Wednesday, July 31st, 2013 EN

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