One of the underlying questions running throughout the ongoing royal commission has been the question: how did Australia’s big banks go so wrong?
While the financial services sector as a whole has been examined, the big four banks have been a particular focus.
Now, the ANZ CEO Shayne Elliott has revealed his hunch as to why banks became so motivated by greed, after counsel assisting Rowena Orr QC put it directly to him.
“Can I ask you to reflect on what those big events were that led to the development of that culture across the industry?” Orr asked.
Elliott immediately pointed to the extraordinary growth the banking sector has enjoyed over the last three decades, riding on the back of a booming Australian economy.
“There’s a large fixed cost in running a bank, the technology, the branch network etc,”
“You have a high-returning business, return on equity (ROE) approaching 20 per cent in the early part of that period and fast-growing. The logical strategy to pursue in that is to grow, is to do more and so the way you do more is to focus on growing revenue,” he explained.
“At some level, it becomes so confined that some people become so focused on just the revenue achievement.”
Going further, however, Elliott identified home loans, one of the biggest drivers of banking revenue, as one of the key growth trends for the big banks during this period.
“If we take home loans, it’s probably the easiest example, the return on equity on the origination of a home loan, so at the time, was somewhere in the 30 per cent area,” Elliott told the royal commission.
“Well, if something has a 30 per cent ROE, and remember the market is growing every year, you know, a commercial enterprise will want as much of that as they can get,” he said.
With the Australian housing market broadly growing at an accelerated pace over this period, Elliott said the banks were clamouring to grow their home loan portfolio as quickly as possible with little thought to much else, including its customers.
“You don’t spend too much time discerning which part of the market you want. It is largely all good,” he said. “And so that is kind – that has kind of fed this culture over a period of time.”
However, while that strategy saw the big banks swell, often disregarding Australians in the process, it is one that is no longer sustainable Elliott admitted.
“That has changed dramatically by the way. The returns now are half that and growth is, you know, close to zero. That is necessitating a complete rethink of strategy and how to succeed.”