Australian and New Zealand banks’ greatest fears for 2014

News release

Revealing Australian and New Zealand banks’ greatest fears for 2014

Australian and Kiwi banks hold greater fears than their overseas colleagues for their sales and business practices and the potential concern social media poses to their reputations, according to the London-based Centre for the Study of Financial Innovation and PwC.

The findings are contained in the report Banking Banana Skins 2014: Inching towards recovery which describes the risk outlook for the banking industry in 2014. The report reveals that anxiety about the state of the global banking system has improved for the first time since 2007, prompting the report’s preface to note that ‘the post-2007 financial crisis is finally over, in that general anxiety levels in the industry have started to ease’.

While Australasian banks’ ‘anxiety levels’ were broadly consistent with their overseas counterparts, they had a higher level of perceived preparedness to handle the risks identified than the world average. [Australasian banks scored 3.53 out of a possible 5 on a scale where 5 = well and 1=poorly with the world average of 3.04.]

“This positive variance in the level of preparedness between the Trans-Tasman banks and the rest of the world reflects our ‘can do’ attitude and also confirms that the banking issues caused by the global financial crisis (GFC) haven’t been as severe in this part of the world as that experienced abroad,” PwC’s Banking and Capital Markets Leader Sam Shuttleworth says.

Greatest fears for our Australasian banks include:
• Sales and business practices ranked as the fifth main risk confronting the banking system Down Under, compared with 16th globally. Indeed, looking at the Australian banks alone, this was their second main risk identified.

“Risks associated with sales and business practices have been a significant concern for overseas banks with multi-billion dollar provisions being held due to product mis-selling. In our part of the world, this remains front of mind given the investigations being undertaken by the Financial Markets Authority and the Commerce Commission. While it is too early to say where these investigations will get to, there is a reputational hazard that the Australasian banks are navigating their way through, but also, bankers are acutely aware that customers continue to be their top priority,” says Mr Shuttleworth.

• Social Media and the reputational risk this poses was ranked as the seventh major risk to Australasian banks, compared with 19th globally.

“The risks around social media are largely reputational,” Mr Shuttleworth says.

“In the world we are in, customer experiences can be shared real-time through Facebook, Twitter and the like, with no real predictability on what will become a story or not. However, with the Trans-Tasman banks embracing the digital era of banking and delivering customer services, the ranking suggests that social media is more of a concern in our part of the world than elsewhere.

“This trend was also evident in our recent Global Digital Banking Survey, which showed Asia Pac banks are leading the way in the digital space. Digital strategies are routinely part of the banks' board agendas, banks having a grasp of what their customers want and need, and they have the talent to expand their digital channel offerings thanks to collaboration across their organisations.”

• Regulation risk was the top risk for Australasian banks and their overseas counterparts, with the risk of the economy slipping down a couple of places.

“This demonstrates that regulations vital to ensuring there will be no GFC II, are now seen as a burden, with a huge amount of regulation potentially engulfing the banks to the detriment of the global economy. While it is clear regulation was needed, getting the right balance is important, especially once you overlay the cost of regulation,” says Mr Shuttleworth.

• Political interference goes hand in hand with regulation risk, and is considered to be the third highest risk for our banks Down Under, and the second highest risk for banks globally.

“The concern is this interference would add costs and constraints to banks and impede their ability to function. From a behavioural perspective, the concern over ‘bank bashing’ could delay the improvement in the public’s perception of the banks. The high correlation between regulation and political interference risks, shows this is a concern for our banks and again, highlights the need to get the right balance. While ensuring we have stronger banks and safer banking systems, we need to consider the impact of any excessive punitive requirements. This is a perfect dilemma – long-term benefits versus short term costs,” says Mr Shuttleworth.

• Pricing of risk, one of the major causes of the GFC, continues to be seen as a problem by Australasian banks, even though increased regulations should make this harder.

“However, looking through this risk outlook, it is more symptomatic of largely benign credit markets and competitive pressures amongst our banks, than actually mispricing the risk,” concludes Mr Shuttleworth.

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