Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 302

3 key risks: banks are too big to behave badly

It’s difficult to imagine the landscape without them. Indeed, history has shown that they’re too big to fail. However, revelations from the Financial Services Royal Commission have certainly taken a toll on how we perceive our major banks.

As investors, we have been long-term beneficiaries of the regular dividends they pay and yet some of the conduct uncovered has been reprehensible. So as investors, how should we look at banks in the future?

For me, there are three key areas to consider:

1) The importance of managing risk

Since the GFC, banks have made many changes to shore up what were already strong capital foundations. Capital ratios have risen almost three-fold in 10 years to ‘unquestionably strong’ levels. Liquidity management has also strengthened with banks switching to more stable sources of funding and increasing their holdings of liquid assets. As a consequence, Australian bank return on equity (ROE) has slightly decreased to around 12% but still remains strong by international standards (around 8% for large US banks).

Today, we’re largely at the tail-end of this shoring up process, although as highlighted by the Royal Commission, there’s still some work to do to mitigate operational risk stemming from poor culture. To date, the financial implications for ‘banks behaving badly’ have been relatively minor, but the consequences of reputational damage could significantly impact profitability if it continues.

2) A slowing credit market

In the last 12 months the credit market has noticeably slowed, as shown below. This is likely to continue, at least on the investor side, as a result of households becoming more cautious and banks tightening their lending standards. With household debt at high levels relative to global benchmarks, this isn’t altogether a bad thing. In fact, longer term it will have a positive impact on our financial security as Australia and the banks will be more resilient to a downturn.

Credit growth (six-month-ended annualised)

Source: APRA, RBA

Shorter term however it does have a couple of implications for the majors:

  • Fewer loans mean less profit.
  • Tighter lending practices mean more stringent checks and balances which increases the time it takes to process a loan application.

Tighter lending standards have meant more paperwork because it’s new and the process is still quite manual. Over time, it will become increasingly automated making the process much faster and importantly cheaper. We can expect to see technology projects replace people as the need to reduce the cost of labour intensifies.

3) Disruption from an intruder

In the last 10 years, we have witnessed some remarkable changes in market leadership in other industries. Established Goliaths have fallen as disruptors have swept in and completely sidelined their business models. So, could something like this happen to the major banks?

There will continue to be smaller companies which pick off individual niches. For example, OzForex in foreign exchange and AfterPay in payments. But when it comes to the core banking operations, Australian banks have invested heavily in technology particularly around service and convenience and a disruptor would have to offer something unique to displace them in a material way. This is especially true in banking, given the time it takes to establish the ‘trust’ many of us seek from our institutions.

Perhaps what strikes me most about Australia’s banks is their ability to adapt. Whether it be self-regulation to strengthen their financial health or investing heavily in technology to meet the changing needs of their customers, they really are the ultimate market chameleons. And they’ll need to be.

The GFC proved they were ‘too big to fail’ but today the message from the Royal Commission is clear - they’re 'too big to behave badly'.

 

Kate Howitt is a Portfolio Manager of the Fidelity Australian Opportunities Fund. This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL 409340 (‘Fidelity Australia’), a member of the FIL Limited group of companies commonly known as Fidelity International. This document is intended as general information only. You should consider the relevant Product Disclosure Statement available on our website www.fidelity.com.au.

Fidelity International is a sponsor of Cuffelinks. For more articles and papers from Fidelity, please click here.

© 2019 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited. FD18634

RELATED ARTICLES

The sorry tale of our big banks

The outlook for Australian banks

A big win for bank customers against scammers

banner

Most viewed in recent weeks

What to expect from the Australian property market in 2025

The housing market was subdued in 2024, and pessimism abounds as we start the new year. 2025 is likely to be a tale of two halves, with interest rate cuts fuelling a resurgence in buyer demand in the second half of the year.

The perfect portfolio for the next decade

This examines the performance of key asset classes and sub-sectors in 2024 and over longer timeframes, and the lessons that can be drawn for constructing an investment portfolio for the next decade.

Howard Marks warns of market froth

The renowned investor has penned his first investor letter for 2025 and it’s a ripper. He runs through what bubbles are, which ones he’s experienced, and whether today’s markets qualify as the third major bubble of this century.

9 lessons from 2024

Key lessons include expensive stocks can always get more expensive, Bitcoin is our tulip mania, follow the smart money, the young are coming with pitchforks on housing, and the importance of staying invested.

2025: Another bullish year ahead for equities?

2024 was a banner year for equities, with a run-up in US tech stocks broadening into a global market rally, and the big question now is whether the good times can continue? History suggests optimism is warranted.

The 20 most popular articles of 2024

Check out the most-read Firstlinks articles from 2024. From '16 ASX stocks to buy and hold forever', to 'The best strategy to build income for life', and 'Where baby boomer wealth will end up', there's something for all.

Latest Updates

Shares

The challenges with building a dividend portfolio

Getting regular, growing income from stocks is tougher with the dividend yield on the ASX nearing 25-year lows. Here are some conventional and not-so-conventional ideas for investors wanting to build a dividend portfolio.

Retirement

How much do you need to retire?

Australians are used to hearing dire warnings that they don't have enough saved for a comfortable retirement. Yet most people need to save a lot less than you might think — as long as they meet an important condition.

Economics

Why a deflationary shock is near

Strategist Russell Napier says central banks have lifted interest rates too far and a deflationary shock is coming. He believes Governments will react radically and investors should avoid bonds and US stocks, and own more gold.

Economy

Federal budget forecast errors need greater scrutiny

The discrepancies that are appearing between Treasury budget forecasts and actual outcomes need closer examination. The inaccurate forecasts are impacting economic projections and investment decisions.

Investment strategies

A reluctant investor’s guide to understanding bitcoin

As every aspect of our lives has been transformed by digitisation, the changing nature of money and currencies should come as no surprise. But while bitcoin is here to stay, many investors still lack a clear grasp of what it is. 

Investment strategies

Unearthing small and mid-cap gems

Small and mid-cap companies aligned with long-term trends like security, climate and digital media can offer compelling growth opportunities. Here are three US stocks that are set to take off in 2025.  

Shares

Decoding the DNA of exceptional companies

Successful companies depend on management decisions, with bold choices, long-term vision, and calculated risks driving growth. Luxury brand, Hermès, exemplifies this, resulting in it creating immense shareholder wealth. 

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.