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

  •   17 April 2019
  • 1
  •      
  •   

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

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

A speech from the Prime Minister on fixing housing

“Fellow Australians, I want to address our most pressing national issue: housing. For too long, governments have tiptoed around problems from escalating prices, but for the sake of our younger generations, that stops today.”        

Taxation

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

Exchange traded products

Multiple ways to win

Both active and passive investing can work, but active investment doesn’t in the way it is practised by many fund managers and passive investing doesn’t work in the way most end investors practise it. Here’s a better way.

Economy

The Future Fund may become a 'bad bank' for problem home loans

The Future Fund says it will not be paying defined benefit pensions until at least 2033 - raising as many questions as answers. This points to an increasingly uncertain future for Australia's sovereign wealth fund.

Investment strategies

Managed accounts and the future of portfolio construction

With $233 billion under management, managed accounts are evolving into diversified, transparent, and liquid investment frameworks. The rise of ETFs and private markets marks a shift in portfolio design and discipline. 

Property

Commercial property prospects are looking up

Commercial property is seeing the same supply issues as the residential market. Given the chronic undersupply and a recent pickup in demand, it bodes well for an upturn in commercial real estate prices.

Infrastructure

Private toll roads need a shake-up

Privatised toll roads in Australia help governments avoid upfront costs but often push financial risks onto taxpayers while creating monopolies and unfair toll burdens for commuters and businesses.

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.