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

Clime time: A big win for bank customers against scammers

banner

Most viewed in recent weeks

2 billion reasons to fix retirement income

A proposal to address Australia's 'stranded balances' in retirement by requiring super funds to transition members to pension phase at 65, boosting retirement income and reframing super as a source of income.

The ultimate superannuation EOFY checklist 2026

Here is a checklist of 28 important issues you should address before June 30 to ensure your SMSF or other super fund is in order and that you are making the most of the strategies available.

Do super funds need a massive wake up call?

UK retirement expert, Guy Opperman, believes super funds are failing at supporting members in deaccumulation. Here is what Australia should do about it. 

Two months into retirement

A retirement researcher's take on retirement and her focus on each of her six resource buckets to stay engaged during the transition and beyond.

Welcome to Firstlinks Edition 662 with weekend update

The debate over the budget is increasingly shaped by frustration and perceptions of unfairness, rather than clear-eyed assessment of policy outcomes.

Reforming the taxation of wealth and wealth transfers

As the budget approaches debate continues about the need and method for addressing wealth inequality. Could reinstating wealth transfer taxes be the answer?

Latest Updates

Back to the future - Why indexing CGT is a good idea

A return to indexation of capital gains would be a fairer way to compensate households for the effects of inflation than the current discount. Importantly, it opens the door to future, broader reforms to stop the taxation of inflation.

Australia has no death duties. Technically.

Australia may not levy formal death duties, but a growing web of tax measures is quietly shaping what wealth passes between generations. Now, the 2026 budget adds another layer.

Strategy

The folly of the Iran war

From oil shocks to fractured alliances, the Iran war carries the hallmarks of a historic policy misstep - one that could tip an already fragile global economy into crisis.

Taxation

Noel Whittaker’s take on the budget

Marketed as a fix for inequality and housing affordability, the latest budget instead delivers a tangle of tax changes that leave everyday Australians worse off.

Investment strategies

The red metal's long game

Copper has had a rough few weeks but investors should not ignore the potential for future price increases as supply increasingly falls behind demand.

Taxation

The lesser-known effects of changed property taxes

The budget’s property tax reforms are being framed as fairness measures, but they risk splitting the housing market, penalising lower‑income investors and introducing distortions that may prove costly.

Latest from Morningstar

Why stocks sometimes fall for no obvious reason

The vast and opaque world of private assets is a powerful gravitational force - and when trouble hits, it's the more liquid public equities that often the feel it first.

Sponsors

Alliances

© 2026 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.