The Hayne royal commission has made a number of recommendations regarding the misconduct across the Australian financial system – reforms that would support the credit profile of the Australian banking and insurance sectors if effectively implemented, according to S&P Global.
“We don't expect major changes to the industry structure or competitive landscape, apart from consolidation in mortgage broking, and to a lesser extent, changes in life insurance sales,” the global ratings agency said. “In addition, higher regulatory and compliance costs amid low credit growth would modestly cut the banking sector's earnings in the short term.”
S&P said the recommendations are expected to improve the risk culture of Australian financial institutions.
“Changes implemented by the banks and insurers as a consequence – whether by themselves or due to the recommendations – should strengthen the risk culture,” S&P said. “Stronger risk management, in turn, should help offset pressures on bank-credit profiles because of lower earnings due to more rigorous governance and regulation for financial institutions amid subdued credit growth.”
The agency said stronger governance and sales and claims oversight for insurers would not only benefit consumers but would also “ultimately enhance the industry’s reputation.”
It noted, however, that despite broad partisan support to some 76 recommendations by the royal commission, the implementation of future financial policies could be nuanced, particularly on distribution of life insurance or mortgage broking.
And while the financial sector continues to face systemwide risks, including lapses in governance and gaps in effectiveness of regulation, as highlighted by the royal commission hearings, S&P said “the regulation, governance, risk appetite, and risk management within the Australian financial institutions sector remain strong by global standards.”
“We also note that Australian financial institutions and regulators have been responding to the issues highlighted within the Royal Commission hearings over the past year,” S&P said.
S&P said the implementation of the recommendations would likely soften earnings growth.
“That's because of the stricter enforcement of governance and responsible lending standards, increasing customer focus, and higher expenses to remediate existing lapses and strengthen compliance,” S&P said. “Nevertheless, we expect such headwinds to be relatively short-lived, and banks' earnings trajectory to be driven more by macroeconomic factors and regulatory changes.”
