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

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Why it’s time to ditch the retirement journey

Retirement isn’t a clean financial arc. Income shocks, health costs and family pressures hit at random, exposing the limits of age-based planning and the myth of a predictable “retirement journey".

The housing market is heading into choppy waters

With rates on hold and housing demand strong, lenders are pushing boundaries. As risky products return, borrowers should be cautious and not let clever marketing cloud their judgment.

Latest Updates

Interviews

AFIC on the speculative ASX boom, opportunities, and LIC discounts

In an interview with Firstlinks, CEO Mark Freeman discusses how speculative ASX stocks have crushed blue chips this year, companies he likes now, and why he’s confident AFIC’s NTA discount will close.

Investment strategies

Solving the Australian equities conundrum

The ASX's performance this year has again highlighted a persistent riddle facing investors – how to approach an index reliant on a few sectors and handful of stocks. Here are some ideas on how to build a durable portfolio.

Retirement

Regulators warn super funds to lift retirement focus

Despite three years under the retirement income covenant, regulators warn a growing gap between leading and lagging super funds, driven by poor member insights and patchy outcomes measurement.

Shares

Australian equities: a tale of two markets

The ASX seems a market split in two: between the haves and have nots; or those with growth and momentum and those without. In this environment, opportunity favours those willing to look beyond the obvious.

Investment strategies

Dotcom on steroids Part II

OpenAI’s business model isn't sustainable in the long run. If markets catch on, the company could face higher borrowing costs, or worse, and that would have major spillover effects.

Investment strategies

AI’s debt binge draws European telco parallels

‘Hyperscalers’ including Google, Meta and Microsoft are fuelling an unprecedented surge in equity and debt issuance to bankroll massive AI-driven capital expenditure. History shows this isn't without risk.

Investment strategies

Leveraged single stock ETFs don't work as advertised

Leveraged ETFs seek to deliver some multiple of an underlying index or reference asset’s return over a day. Yet, they aren’t even delivering the target return on an average day as they’re meant to do.

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.