The Australian government will increase its scrutiny of banks in 2025 –an election year – as public resentment builds over the sector's continued profitability, according to S&P Global Ratings.
"[With] risk-adjusted returns of between 1.1 per cent and 1.6 per cent, the profitability of Australia's major banks is on par with other oligopolistic banking systems, such as Canada," the ratings agency noted in a report this week.
"That comparison does little to deflect the politicking that may flow from public resentment about banks in an election year."
However, while this may influence individual banks' operational practices it will not compromise the strong credit profiles of Australian banks overall. Thar was one conclusion drawn in the S&P Global Ratings report.
Nevertheless, as S&P noted, public perception is important, current political pressure continues take its lead from the 2017-2019 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
This showed banks were generating large profits while providing unsatisfactory customer outcomes and charging excessive fees.
The actions uncovered by that Royal commission and subsequent investigations into the Australia's banks have opened the way for political pressure to be applied widely across the sector.
"We expect the government will strongly encourage banks to maintain branch footprints, cash services and pass on rate cuts [in full] to financially stretched households," the ratings agency stated.
The S&P report detailed several recent actions by government regulators, notably on the vexed question of branch closures:
"The recent agreement between the government and major banks to impose a moratorium on regional bank branch closures until 2027, along with the expansion of Bank@Post Services, demonstrates the government's commitment to preserving access to physical banking in regional Australia.
"We expect the government will continue to encourage banks to maintain regional branches," S&P said, citing comments by CBA's chief executive, Matt Comyn, to a Senate enquiry that the bank operates 728 branches and spends about A$1 billion annually on its branch network, an implied average annual operating cost of around A$1.4 million per branch
"As part of the government's approval of [ANZ's] acquisition of Suncorp Bank, ANZ agreed to no regional bank branch closures for three years. This applied to both ANZ and Suncorp branches.
"We believe major bank ratings have ample headroom in their credit ratings to absorb the costs of unprofitable branches," S&P observed.
Another politically live topic is the continued use of cash by some segments of the Australian population. Again, S&P cited CBA data, which showed the group reported that maintaining cash services cost it $410 million in the last financial year, while generating fees of $60 million, for an overall net loss of $350 million.
"Despite the economic reality, we believe political pressure prevents major banks from simply walking away from cash services," S&P said.
The rating agency was, however, upbeat on the Financial Accountability Regime, which was seen as decisive in managing moral hazard, where executives might engage in risky behaviour for immediate rewards.
"We believe the new deferred remuneration obligations introduced under the [FAR] are among the most significant changes enhancing accountability," S&P reported.
"By requiring 40 per cent of executive bonuses to be deferred for four years, Australia aligned with international peers such as the EU, the UK, and the US, which have similar deferred remuneration regimes. This approach adds personal accountability, as executive compensation is directly tied to good governance and financial stability," the report concluded.