Australian Banking Sector: Royal Commission announced

Process fast-tracked, findings due by 1 February 2019: The government has announced a royal commission into the banking sector. This followed a letter released by the four major banks earlier today highlighting the need for certainty and the imperative to restore confidence in the sector.

This letter proposed items for consideration such as the composition of the commissioners, proposed terms of reference (including being free of political influence) and the need to replace a range of ongoing inquiries – that may or may not be acted upon by the government. The royal commission is wide-ranging (spanning the major and regional banks, wealth managers, superannuation providers and insurance companies) with the final report to be due by 1 February 2019.

Short term volatility, long term certainty 

There are lots of moving parts in the equation and the cost to each bank will become clearer in due course – that is the price of holding a bank licence and long term certainty. In the meantime, the banks that should be more resilient to short term volatility include ones that have stronger domestic top line prospects and sufficient room for further cost management.

Larger retail-oriented banks such as CBA and WBC would probably incur higher costs given their scale and complexity while the regionals should fare better given their community involvement and focus. Of the majors, we believe NAB is the most resilient – based on flexibility to further reduce costs (including putting on hold its accelerated investment spend given changing market conditions) – although we will revisit the pecking order as soon as practicable. Regardless, MQG remains our top sector pick.

• ANZ (Hold, price target $32.50)
• CBA (Buy, price target $83.90)
• NAB (Buy, price target $34.20)
• WBC (Buy, price target $34.60)
• BEN (Hold, price target 12.50)
• BOQ (Hold, price target $13.50)
• MQG (Buy, price target $108.00)