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Competition within the Australian banking sector

CHAIR —Welcome. Would you care to make an opening statement?

Mr Smith —Yes, I will make a short opening statement. Firstly, Australia’s banking system is regarded as a standout globally, having weathered the GFC remarkably well. Australia’s banks maintained the flow of credit to the economy both through the height of the instability which was triggered by the collapse of Lehman Brothers in September 2008 and subsequently. Our strong banking system underpinned the economy and, indeed, employment. This is in stark contrast to the position in many developed countries, and I think it was aided by the swift action on the part of the Australian government and the regulators to deal effectively with systemic risk that threatened the banking sector and the health of the Australian economy and jobs within the economy.

The introduction of the deposit guarantee instilled confidence in depositors, and the wholesale funding guarantee ensured banks continued to access international funding on reasonable terms in the time of crisis. The government’s action was necessary at the time and the wholesale funding guarantee has subsequently been withdrawn in an orderly and, I think, appropriate way. Australia is one of the few OECD countries where the government has been a net beneficiary of revenue from its banking system as a result of the GFC. Around $5.5 billion will be paid by banks to the government for credit enhancement by the time the last of the guaranteed wholesale funding expires.

The second issue is that the nature of competition has changed. Competition in the deposit market has never been so intense. Deposit rates have been bid up as financial institutions compete for stable sources of funds. Our Asian operations have been an advantage to us. They enable us to access the savings pools of customers in Asia and thereby supplement the deposits we raise in Australia. Depositors in Australia are presently benefiting from interest rates of up to seven per cent and there are almost four times as many deposit customers as there are mortgage customers. The higher cost of this funding is, of course, flowing through to lending. This means lending rates are increasingly less related to the RBA’s official cash rate. The GFC also exposed the business model of some of the non-bank lenders to be unsustainable in that they did not properly price for liquidity or credit. Those lenders have exited the market. Other small lenders reliant on securitisation for funding have been affected by the sharp drop in demand for RMBS. This created a gap in the market that was filled by the major banks.

Thirdly, government policy measures appropriate to smooth adjustment to the shock of the GFC are those that facilitate competition without imposing unnecessary costs on our customers. The government’s banking package includes some measures which fit this description. Further support for the securitisation market through the AOFM will assist funding of smaller lenders. Australian RMBS are of high quality and this approach can be easily switched off when it is no longer needed. Diversifying funding sources is also appropriate. Developing a significant Australian corporate bond market attractive to retail investors and allowing the issuance of covered bonds are directionally right.

Turning to customer empowerment: active, well informed customers help lift competition. In the short to medium term, more transparent fees and shorter, more effective disclosure requirements would allow customers to more readily compare products and assist informed decision-making. The idea of the proposed mortgage fact sheet is to provide a simple statement which will help consumers compare the costs and features of mortgages. Financial institutions can also assist here by providing simple, transparent products. In the longer term, more financially literate and informed customers will grow competition in the market. ANZ has made a significant investment in understanding the issues related to low levels of financial literacy, and which groups in the community are most affected, and in developing programs aimed at building the skills of the more vulnerable in the community. Our programs are delivered in partnership with the government and community organisations such as the Brotherhood of St Lawrence. Some of those organisations have made submissions to this committee. That concludes my opening statement. I am now very happy to answer questions from the committee.

CHAIR —Thank you, Mr Smith. I note that in your opening statement you have not addressed the issue of your funding costs, yet you do so in your submission. Would you care to outline what is happening with your costs of funding at present?

Mr Smith —There are three aspects to the adjustment of cost of funding that has happened post GFC. The first is that the cost for wholesale funding, on which the Australian banking system is reliant, has adjusted as part of the global market’s adjustment in credit pricing—pricing for risk. So banks are now thought to be of higher risk than they were before.

The second issue is that the competition for domestic deposit gathering has got very, very intense and, therefore, the cost of deposits has been bid up. There is a difference of some 160 basis points for the average deposit rate vis-a-vis the official cash rate before the crisis and after the crisis. For mortgages, the difference would be 100 basis points. So that is the squeeze.

The third thing is that the mix of our liability book has changed so that we have put in place far more longer-term funding. This has been done to protect the AA rating, which is so important for the banks, and also at the behest of APRA, in that they would rather see that stability of long-term funding.

CHAIR —And Basel III changes may well require you to head in that direction?

Mr Smith —Basel III will create further issues, particularly around liquidity. But, in terms of the actual deposit ratio, it is going to be far stricter than it was in the past.

Mr Hodges —I will just add another thought to that if I may. When we look at the proportion of our domestic customer base that we use, our domestic customer funding—which we have tried to grow through the crisis because it is a stable form of funding—we have lifted that. As Mike said, the overall pressure on domestic deposit markets reflects that. But we have also seen a mix shift within the domestic deposit market because, as interest rates for deposits have risen, the opportunity cost of sitting on a low-interest deposit versus taking a high-interest deposit increases. So what we have seen is a switch in our book as well. People have moved from low-rate deposit products to higher-rate deposit products. Term deposits have clearly become much more attractive, and we have seen more of our funding shift into those higher-rate deposit products as well.

CHAIR —What percentage of your funding comes from across-the-board deposits?

Ms Nash —58 per cent.

Mr Hodges —Chart 6 of our submission shows that.

CHAIR —It is a fairly substantial proportion of where your funds come from. Presumably, looking at those different sources of funding and the pressures that are upon them in terms of prices, the ANZ’s evidence is that they are increasing and continuing to increase. The overall funding in those three areas of funding that you referred to your evidence is that they quite clearly have increased throughout the GFC. Are they continuing to increase? What is happening to the average cost across that funding?

Mr Smith —Yes, they are. The funds both in the domestic market and in the offshore market are continuing to increase. It has stabilised a little bit in that the actual credit markets internationally have stabilised but what is happening is that deals that were put on pre-crisis at 16 basis points are being renegotiated at something like 120 or 130 basis points. There is actually a graph on page 7 of our submission which shows how that repricing will move forward. So we will continue to have upward pressure on our margin until 2012. Then you will see it will stabilise but at that higher base.

CHAIR —Okay. Mid-2012, did you say?

Mr Smith —It probably will be. I would say from the look of this graph it is about the first half of 2012. Until then we are going to see a steady increase in pressure.

CHAIR —In your overall cost of funding.

Mr Hodges —We have about 20 per cent of our wholesale term funding which is pre-crisis. So that is still to flow through.

CHAIR —That still has to flow through. Presumably at some point there will be funding that you took out during the peak of the crisis at a high level.

Mr Hodges —Yes.

CHAIR —Which is going to start coming off and that is when your cost—

Mr Smith —That will compensate. That will actually bring it down to—

CHAIR —And that is more in your long-term wholesale funding. What will happen to your overall average cost of funding will depend to some degree on what is happening with deposits at the time and probably to a lesser degree short-term wholesale funding.

Mr Smith —That is correct.

CHAIR —This question is not designed to trap you. I have asked the same of another two major banks as well. The Reserve Bank on Monday indicated that on their assessment of the major banks their cost of funding since mid-2009 has basically risen in parallel with the increase in the cash rate. It has not risen above that since then. Their argument was that while the long-term wholesale funding continues to increase at a greater level that is being offset by a stabilisation in short-term wholesale funding costs and stabilisation in deposit costs. That is their assessment. Neither of the other banks agreed with that and I doubt that you will either but I am interested in your views.

Mr Smith —You are right! I understand where they are coming from because they are talking about this window during which time the credit markets internationally have actually smoothed out. In fact they started to peak up again as a result of problems in Europe and I suspect we will continue to get these ups and downs. Because we are only assuming that this is going to continue to be quite smooth so long as credit markets globally remain less volatile than they were of course during the height of the crisis. What they have not taken into account is the lag effect of that repricing that we have on the longer dated stuff. Also I think that with the domestic deposits they have not really factored in some of the very aggressive pricing that has gone on there.

CHAIR —Do they not have access to the information they need.

Mr Hodges —I think they can see absolutely what particular product rates are but we obviously get mix effects going on in that all the time. I think in a broad sense they watch where these rates go but they cannot see the same detail we can of how our book is structured.

CHAIR —So it is a detail issue you think that leads them to draw that conclusion. Quite clearly, their conclusion is something that you do not agree with.

Mr Smith —No, I do not. But I can understand how they could think it. If you were looking purely at the way the international markets were moving, it would be easy to draw that comparison. But you would have to look at the whole maturity of our book—which is quite a complex issue—and also the different structures in the different countries. One of the issues is that we operate in 32 countries and we have a very different liquidity management for each place. This is a group issue for us. It is quite complicated.

CHAIR —I am sure it is complicated, and it is probably beyond most of us to understand the detail—certainly beyond me. So you are saying that you can understand why they would draw that conclusion on the basis of the information before them. Do you not make the information available that they would need to draw the proper conclusion?

Mr Smith —Yes, we do. I think there was a speech by the RBA yesterday—

Mr Hodges —Even today, where they have been talking about funding costs and recognition of funding pressures. It is clear that we are perhaps privy to slightly more detail in terms of how our individual bank books are working. As Mike said, it is a complex issue.

Senator CORMANN —Trust us; we are from the bank!

CHAIR —It depends on what you are talking about.

Mr Smith —If there is a lesson to be learned here it is that when the RBA comes out with some comment like that we should actually go straight back and say, ‘Hang on a minute; this is the information that we have got, which doesn’t agree with that.’ I do not think we have perhaps had a quick enough dialogue.

CHAIR —That statement is actually contained in their submission to this inquiry. I will try to find it.

Mr Smith —I remember the statement.

CHAIR —Treasury also have made statements. They made statements before the Senate Economics Legislation Committee at estimates recently that they keep a close eye on the banks and they do not think that their funding costs are sufficient to justify increases over the official cash rate. They made statements to that effect on Monday in Sydney—that they do not believe that that is the case. I suspect to some extent the advice that is coming from Treasury and the RBA is informing the Treasurer when he goes out and makes similar statements. I believe the Treasurer has made statements saying that he does not accept that your funding costs are such that they justify increases above the official cash rate. Do you agree with the Treasurer?

Mr Smith —I think that they have been operating with information perhaps similar to what the RBA has and they have come to a different conclusion from the banks. It is very difficult to know exactly how they have calculated this. I would go back to the fact that we would not want to increase rates unless we really had to. This is not a decision that is taken lightly. It is not something that is easy to take and can only be done for very, very sound commercial reasons. The last thing we want to do is to put our customers at risk. The last thing we need is customers with problems. That is a real problem for us.

One of the things that I have been a little bit concerned about is that there seems to be a perception that customers do not matter to banks. Customers do matter. We cannot survive as a business without customers. It is everything. It is front and centre. And we care what is going on with the customers.

CHAIR —I understand that. To some extent, I am interested in the view that the Treasurer and the regulators have formed and how that is different to the view that you have formed. Has Treasurer or anyone from his office ever rung you to ask you personally why you have increased the rates above the official cash rates?

Mr Smith —I have had regular meetings with the Treasurer and contact with him and his office over many months. When the issue of funding has come up, they have had their view on this and we have had ours, and we have tried to explain where we come from and they have tried to explain to us where they are coming from.

CHAIR —Quite clearly, as of Monday at least, you have not convinced Treasury of your perspective.

Mr Smith —I think the comment is that we agree to differ on this.

CHAIR —After the November cash rate rise you increased your rate at a greater degree than the cash rate. Did the Treasurer call you after you announced your intention to do that?

Mr Smith —After we announced it?


Mr Smith —No, but I rang him just before we did it.

CHAIR —Prior to the public announcement you rang him to let him know that was happening?

Mr Smith —Yes, which is normal.

Senator CORMANN —What did he say when you advised him? What was the reaction?

Senator HURLEY —Come on. It was a private conversation.

Mr Smith —I think the fact that we maintain a dialogue over these issues is important, particularly with his office and with the Treasury.

Senator CORMANN —But he did not try to dissuade you in any way?

Ms Nash —I do not necessarily think it is appropriate to go into the content of the conversation.

Senator BRANDIS —It is a matter of considerable public interest.

Senator CORMANN —I think Mr Smith was quite happy to answer, but I can see that he was protected from the side.

CHAIR —Can I ask a slightly different question: did the Treasurer ask you to justify why your interest rates needed to increase more than the official cash rate?

Mr Smith —No. I think it was very clear that he felt there was not a need to and we felt there was, and that need was based on our facts, not on—

CHAIR —On the basis of that phone call or otherwise in respect of that great rise, did he ask you or the bank to provide in writing an explanation of why it needed to raise its rates more than the official cash rate?

Mr Smith —No, and I do not see why he would do that.

Senator CORMANN —You said at the beginning of the discussion on this that you would not increase rates by more than you had to. Why wouldn’t you do that? A view has been expressed by various witnesses that not just your bank but banks in general would increase rates by as much as they think the market can bear in any given circumstance—I think one witness said, ‘As much as they can get away with.’ In terms of the way the system operates, what is preventing you increasing rates by more than you have to? Is it just because you have a good heart?

Mr Smith —No, it is a competitive environment. You cannot be out of market; you have to be able to compete.

Senator CORMANN —But you have a fair idea what your competitors are doing and that, in a broad sense, they are going along similar lines.

Mr Smith —I know what the other banks’ balance sheets are doing. There is so much information in the public space about banks.

Senator CORMANN —When you say you have to compete, that really suggests that you do go as far as the market can bear rather than as much as you have to.

Mr Hodges —I disagree. I think what Mr Smith is saying is that it is a competitive market. If we see an opportunity to grow our business in that market in a segment that we are really interested in chasing, it gives us that opportunity. We have been growing our business across most of the markets in the last 12 months and, we think, we are very competitive.

The other thing it is worth reflecting on is that pricing is only one aspect of the competition in the marketplace. People compete on the features of the products and on service. In fact, over a long time now our bank has had a convenience and simplicity strategy around retail banking and that is what our customers tell us really works well for them. You always have to be in the market around pricing, but non-price issues are just as important for many of the customers. That is why we are No. 1 in customer satisfaction and have been for at least five years. We really work very hard on our customer proposition—on what customers are asking for. As I said, you have to be in the market; you have to be on someone’s shopping list. Price is one of the important factors, but it is not the only one. We think it is a very competitive market, frankly. If there is an opportunity for us to expand our business, we will look at that, and we are obviously doing that at the moment. We are growing above our system.

CHAIR —I will move on from funding and interest costs; other senators may ask questions in that area. The Treasurer’s reform package was announced on Sunday and to some extent it fits in with what you were talking about regarding the market already being competitive. This is quite clearly intended to enhance competition. To what extent do you think the measures outlined in the reform package are likely to enhance competition in the banking market?

Mr Smith —I think there are some things there I agree with and some things that I don’t. As I mentioned in my opening remarks, there are a couple of things with regard to access to funding for the smaller players which are positive. I think the securitisation take-up by the government—an extra tranche of that—is not going to make a massive difference in terms of the actual quantum that is put in, but it is to stimulate demand for that product from other investors.

CHAIR —It will take things forward even though not at a dramatic level and be of assistance.

Mr Smith —Yes, but I think the thing to do is to kick-start the market again. It is to get that RMBS market moving again. I think that has the possibility of doing that. Anything that we can do to develop the corporate bond market would be positive. I think that would be a good idea, particularly for our customers. On the institutional and corporate side I think it—

CHAIR —And you think the proposal in that respect is likely to have legs?

Mr Smith —I think it is going to be a difficult thing to do. It is not an easy one to change. There are a number of things that I am not as happy about. I think direct legislation on things like exit fees is a mistake. We have already taken away exit fees.

CHAIR —On business and consumer?

Mr Smith —No, just on variable rate mortgages.

CHAIR —Fixed rates are another?

Mr Smith —Not on fixed rates because, obviously, with fixed rates you have to lock in your own funding.

CHAIR —That is right.

Mr Smith —So there is a massive cost if they were to break that. Indeed if this legislation were to apply to fixed rates, which is not clear, it would kill the fixed rates market, I suspect. I think that you should not legislate that. You should let the market deal with that. The prosperity of this country is based on fundamental economic reform which has happened over 30 years, really since the floating of the Aussie dollar, and all governments—from the Hawke to the Keating, Howard, Rudd and Gillard governments—have been moving that way and I would like to hope that they continue.

CHAIR —I concede Hawke, Keating and Howard but not beyond that. So essentially you think overall there are some good things in it and there are some things that you think are not so good. Would you describe your attitude to the package as that it would upset you or upset the ANZ?

Mr Smith —There are bits that are a bit irritating, I have got to say, and there are bits that I think are quite sensible for the industry.

CHAIR —You used exit fees as an example. It sounds, given that you do not have exit fees on variable home loans—

Mr Smith —But I think the issue there is that once you start creating legislation it is the thin edge of the wedge and—

CHAIR —Rather than a practical thing impacting you at the moment, that is more a—

Mr Smith —It is a philosophical issue.

CHAIR —Yes, a philosophical issue.

Mr Smith —It is the principle.

CHAIR —Yes, it is an issue of principle. So it is irritating but it is not something that would make you greatly upset with the government at this point in terms of impacting on your operations.

Mr Smith —That is a fair comment. The covered bonds issue is positive. I think the problem with covered bonds is this. It is a bit like securitisation. It is a drug we should really get off. One should be looking at actually increasing deposits as being the key funding for the bank. Whilst I will put in place a program to test covered bonds, it is not something I would want to rely on for the big banks. But it will probably be a bit more important for the smaller banks, and I can understand that.

CHAIR —Although the evidence that we have received suggests that there is probably a minimum issue amount for covered bonds that may well be beyond—as it is going to be hundreds of millions of dollars probably—

Mr Smith —But they could probably package that and there will be ways—

CHAIR —That is what they would need—exactly. There are some challenges in terms of delivering that.

Mr Hodges —I think that if there are willing issuers and there are buyers out there the market will find a way to package or structure that so that the smaller banks can benefit from that market. I have no doubt that will happen.

CHAIR —I think the other two big banks that we have heard from so far have been probably a bit more enthusiastic about covered bonds than you sound to be.

Mr Smith —They have a slightly different philosophy on their funding. I am a bit more conservative in that respect in that I like deposits.

CHAIR —So what would you recommend in terms of increasing deposits?

Mr Smith —It is a hard one. I think there probably needs to be some sort of adjustment to something like the superannuation funds or something fundamental like that.

CHAIR —Taxation treatment?

Mr Smith —Yes. You change your tax to basically give people an incentive to save. At the moment the only incentive to save is through super. A bank deposit attracts the highest rate of tax you can pay.

CHAIR —It is actually double taxation.

Mr Hodges —It has been that way for a long time and I guess superannuation is a strategic focus for government and has been for a long time, and quite importantly for retirement savings. But it has been at the cost to some extent of the bank deposit, which, as you say, get taxed when you earn it and then gets taxed at the marginal rate. So whether you saw some tax reduction in bank deposits, at the moment the way the system is that is part of the reason why the system is short deposits in Australia. So people tend to save in superannuation or maybe paying down their mortgage as a tax-effective way. It is interesting that people do work that out pretty quickly.

Mr Smith —They get a house.

CHAIR —Thank you. In view of the time I will hand over to Senator Hurley.

Senator HURLEY —Senator Bushby asked you what you thought of the Treasurer’s plan. I presume you are aware of shadow Treasurer Joe Hockey’s nine-point plan. What do you think of that?

CHAIR —Tell us what you think, please!

Mr Smith —I have probably already said enough about that.

Senator HURLEY —So you prefer not to comment. I do not blame you at all. You do not believe that that would be any significantly greater spur to competition than the Treasurer’s plan?

Mr Smith —In any of these issues we have got proposals from both sides of the house. I know that you will not necessarily agree with each other but there is some good stuff in all of it and some things which perhaps are a little difficult to understand how they would take place. I think consultation is the important thing in this. I think that the idea of this account portability and the fact that this is going to go out for further consultation is quite an important thing. The actual logistics and difficulties of doing this and the cost of it would be so huge. I think we forget what the issue is. The main issue of moving account is direct debits. That is the thing that most irritates people. So let us just find a way of doing that, and then we do not need all this other stuff.

Senator HURLEY —I would agree with you completely. Let us talk about some of the nitty-gritty of proposals. A couple of submissions have mentioned the Canadian authority that now deals, I understand, with both mortgage insurance and a kind of a government guarantee of the quality of assets. Do you know anything about that system and you think it might be applicable in Australia?

Mr Smith —I have a fundamental problem with the taxpayer supporting private industry for that sort of scheme. I can understand why it was done in Canada, because you have a slightly unusual situation particularly vis-a-vis what was going on in the US. That system was a sort of pragmatic solution. I do not think it would be great for us. I think it leads to a sort of moral hazard. Having said that, I think it would be useful if the government, as it has suggested, can kick-start the securitisation market in some way. That does not mean it has to own it.

Senator HURLEY —The mortgage insurance question has been raised quite separately from whether the government should manage that but it has certainly been raised with me in terms of being a significant cost for the consumer.

Mr Hodges —When you take out a loan and you have above 80 per cent loan to valuation, you need to take out mortgage insurance. I think I did hear that that is maybe a barrier to people switching because they have to then retake out mortgage insurance. Is that the question?

Senator HURLEY —That is right. It is a cost if you switch.

Mr Hodges —I must admit that I am not familiar with just exactly how that works. It is quite a technical issue.

Mr Smith —You would have to have portability of the insurance product as well as the account.

Mr Hodges —Typically, when we would do a house loan and we would look at the person who is borrowing, we would look at how much they were borrowing. The insurance does provide, effectively, credit enhancement for the bank, because they are borrowing a relatively high amount. Historically, it is always shown that we would have losses on the higher loan to value ratio, which is why you take out mortgage insurance. Conceptually, if you could see that that is the same individual in this bank as in that bank, maybe the insurance policy could transfer. I guess that is something which we need to take up with the insurers.

Senator HURLEY —It would be part of the consultation, hopefully, with account portability.

Mr Smith —The problem is that a number of banks self-insure. So then you would have a problem.

Senator HURLEY —Exactly. I might finish there, Chair, and let others ask some questions.

CHAIR —Thank you. Senator McGauran.

Senator McGAURAN —The three key points of the reform announcement by the Treasurer were the exit fees, the covered bonds and at least an investigation of enhancements to the ACCC’s powers with price signalling. They are the three least headlined—

Mr Smith —That is the other one I did not agree with.

Senator McGAURAN —You do not agree with—

Mr Smith —The price signalling.

Senator McGAURAN —And exit fees. You are very cool on that. Given that announcement, would you describe the points in it this way: bank bashing; pure populism; political football; vendetta against the banks; dangerous and massive economic impact—and, dare say, negative; shame; out-there proposals; push up prices; frighten investment; 25,000 AN Z workers all vote—presumably under your instructions; and base level response? Would you use any of those terminologies?

Mr Smith —No.

Senator McGAURAN —Well, you have.

Mr Smith —No, I have not; not in relation to this situation.

Senator McGAURAN —You have used those terminologies in regard to Mr Hockey’s very points that align with that announcement—all bar the exit fees, which you are very cool about, I should add. They are the exact same points that Mr Hockey made.

Mr Smith —We have already abolished the exit fees; so that does not actually affect us.

Senator McGAURAN —I am focusing more on your reaction.

Mr Smith —My reaction to what?

Senator McGAURAN —You are pulling your punches with the Treasurer’s announcement, which aligns directly with Mr Hockey’s nine-point plan—bar the exit fees.

Mr Smith —No. I said a number of the issues that I did not like were the number that you just read out—the price signalling, the account portability and the exit fees, which in principle I do not think is good.

Senator McGAURAN —Your response goes a long way to the backlash that you received. It was quite hysterical, and you received a backlash accordingly. You also said that this committee would be a vendetta.

Mr Smith —With respect, I did not think that sort of commentary was really proper for me to use in front of you. I am trying to be rational and fact based here.

Senator McGAURAN —Here today; were you then?

Mr Smith —I do not know in what context those remarks were made. I think that is quite difficult for me to—

Senator McGAURAN —Mr Smith, please, you are on—as it has been reported—$10.86 million and you are telling me you do not know in what context your comments were made. If I were the board I would be worried by that. You know very well the contents. I have got the article—

Mr Smith —I said the context.

Senator McGAURAN —Contents or context?

Mr Smith —Context.

Senator McGAURAN —Either. It is in relation to Mr Hockey’s early lead and public charge on these matters.

Mr Smith —Senator, I think I have said enough about that. It was an issue at the time which was difficult to understand. I had just been in a meeting with the leader of the party. These comments came just straight after that. It was a surprise and I reacted. I run a business—

Senator McGAURAN —They are unprecedented.

Mr Hodges —I might say, Senator, I am not sure they are. I have been around long enough to remember a number of fairly strong reactions between banks and parliamentarians going back many, many years. Besides, we are here to try to assist the inquiry in working through what these issues are. I think it is very difficult for Mike to pick out particular comments there—

Senator McGAURAN —We don’t listen to Mr Smith, we are here in this inquiry, but don’t think you are getting off all that lightly. On Mr Hockey’s nine-point plan, as you have put it—which are the key points of the Treasurer’s own announcement—Mr Hockey has ‘taken economic lessons from Hugo Chavez’. I did some investigating on the President of Venezuela. This is a man who wants to socialise, and has socialised, private enterprise. No doubt he has got the banks in sight, but he has certainly nationalised the oil industry there. He is a man who has stripped his own people of their human rights. He despises capitalism. Is that a fair, genuine comparison? Would you like to say something about that? Can you even tell us you regret that comment?

Mr Smith —I do regret it. It was a one-liner which I do not think has been very helpful, to be perfectly honest. I do regret it and I certainly did not mean it personally. But, again, I have said very little about it since.

Senator McGAURAN —But you did cross over to the personal. You used comparisons to be personally hurtful. You made comparisons not only to President Chavez. You were comparing him to Mr Costello and Mr Turnbull. That is a personal attack.

Senator HURLEY —Chair, on a point of order: yesterday you picked me up, in a discussion with Aussie Home Loans, on the relevance of an issue which I thought was directly relevant. I think Senator McGauran is discussing an issue which is a media comment about something that is not directly related to this inquiry. I understand a number of other senators want to ask questions. He is taking up a lot of time on an issue which is peripheral.

CHAIR —Thank you, Senator Hurley. I do not think there is a point of order, but I would remind Senator McGauran that we are here for a purpose, and that is around the terms of reference, so could you please direct your questions to that end.

Senator McGAURAN —Chair, can I just yield, on a similar topic, to Senator Brandis.

CHAIR —Yes. Senator Brandis.

Senator BRANDIS —I will not be long; I just want to deal with the issue of comments by Mr Smith about price signalling. By the way, Mr Smith, I spoke to Mr Hockey a couple of days after you made that remark and I think it was received in the spirit in which it was intended, but it is very gracious of you to express your regrets. Mr Smith, do I understand you are opposed to the proposal for there to be an amendment to the Trade Practices Act in relation to price signalling?

Mr Smith —No, I do not oppose it. I just do not understand the way it has been enunciated at the moment.

Senator BRANDIS —It has been enunciated by the government in reasonably brief and largely rhetorical language in this document, Competitive and sustainable banking system.

Mr Smith —Yes, which I think is the issue. We have got to be very careful that we do not stop banks talking together, because they have to do that in terms of a workout, with a problem customer, or something like that.

Senator BRANDIS —I accept that, and I think that is very sensible, if I may say so. Have you or your officers at the table had the opportunity to consider Mr Hockey’s bill in relation to price signalling which was introduced in the last sitting week of the parliament?

Mr Smith —No, I have not.

Senator BRANDIS —One of the elements of the Hockey bill in relation to price signalling is to make the offence subject to a very strong competition test so that conduct which might otherwise be price signalling will not fall foul of its prohibition unless it is for the purpose and is likely to have the effect of substantially lessening competition. The two elements in the existing Trade Practices Act of purpose and effect are both built into the excusal provisions of the Hockey bill, so it is a stronger competition test than sections 45 or 46 of the existing Trade Practices Act. Would you have any misgivings about a price-signalling prohibition being introduced into the TPA provided that conduct were not actionable unless it were anticompetitive in both of those senses?

Ms Nash —I think that when you put things in that way it does sound sensible, but we have not had a chance to look carefully at the bill. On the surface of it I do not think anybody would necessarily disagree with what you have just said there, but for us—

Senator BRANDIS —I am just telling you what is in the bill.

Ms Nash —Yes, that is okay, but before we can say, ‘Yes, we agree,’ or ‘No, we don’t agree,’ we really need time to take advice.

Senator BRANDIS —Sure; I understand that, though I must confess I would have thought that you might have read it, given the notoriety of the issue and its importance to the bank. But, be that as it may, let me reassure you that ordinary predictive statements that are made in the ordinary course of banking business would not be comprehended by the term ‘price signalling’ as Mr Hockey’s bill is drawn, and unless such conduct were shown to have an anticompetitive purpose and effect it would not be caught by the bill that Mr Hockey has introduced. So it is a very narrow prohibition. In those circumstances, Mr Smith, that wouldn’t frighten you too much, would it?

Mr Smith —Again, I think it depends very much on: ‘Am I allowed to talk about interest rates as part of my normal business?’ And I think we have to—

Senator BRANDIS —I would expect the answer to that question is yes.

Mr Smith —Yes, but I think we have to understand that it is difficult to price signal commodities because by their nature they are just traded, and money is a commodity. It would be rather unusual if I were asked my views on interest rates, or the likely movement of interest rates, or the interest rate environment or foreign exchange—what is the Aussie dollar doing?—unless I could actually see exactly what I could and could not say. But I understand where you are coming from and, as Jane says, it sounds very reasonable.

Senator BRANDIS —Thank you for that. I am just concerned that there are a lot of red herrings being raised by the loose use of this term ‘price signalling’, which in the government’s policy has been essentially expressed in rhetorical language without any protections. If I could encourage you or those who advise you on these matters to study the Hockey bill, which is now a public document, I think you would have a very high level of reassurance that the ordinary course of business sort of statements that you have just described would not be caught by it.

Mr Smith —Okay, Senator, I will do that.

Senator XENOPHON —Mr Smith, I should disclose that I am a customer of the ANZ Bank and my first question is in relation to bank switching, which should not necessarily be seen in the context of my disclosure. You talked about account portability being quite problematic in terms of costs, and I think the Australian Bankers Association said it could cost several hundred million dollars to facilitate it. In the Netherlands they have, as I understand it through Choice’s evidence yesterday, a legally mandated requirement that if you want to switch banks you give an authority to the new institution and they provide the details to that institution. So there is a mandated requirement with some time lines to expedite that happening. Would you look at that differently to having a technological solution to it?

Mr Smith —I think it makes a bit more sense because it is a sort of practical solution. I think that runs for about a year and a day, from memory. That is what they do in the Netherlands so that you could catch all of the standing orders or direct debits that went through your account in a year—you would ensure that you had got them all. I think that that is probably a sensible way of looking at it.

Senator XENOPHON —Jonathan Mott, an analyst with UBS, gave evidence last night in Sydney and he had the view that if a system is too portable it would lead to instability. Do you agree with that as a general proposition?

Mr Hodges —Can I just say that when we looked at what happened in the UK when Northern Rock collapsed a lot of people were watching the queues in the branches but actually a lot of money was taken out through the internet bank. So my sense is: if a customer had issues with a particular institution then they might just withdraw their money and then put it in somewhere else much more quickly rather than try to switch accounts like that. I understand the consequence of what you are saying, but I would have thought that that would be a long way of trying to move your money, frankly.

Senator XENOPHON —Also, yesterday Mr Mott from UBS gave evidence that banks need to have healthy profits or big profits because if they do not then their ratings will go down and if their ratings go down that will push up interest rates. You have a contrasting view from others such as Choice and also Professor Milind Sathye from the University of Canberra, a former deputy governor of the Reserve Bank of India, who takes the view that we have a very highly concentrated banking market here in Australia, based on a number of indexes. Do you accept that view of Mr Mott’s that if your profits go down that could affect your credit rating? And how do you contrast that with Canadian banks, which seem to have equivalent credit ratings to Australian banks but whose profit levels may be a little bit lower?

Mr Smith —Canadian banks are actually as profitable as—

Senator XENOPHON —So I am wrong about that?

Mr Smith —Yes, in terms of return on equity—if we are looking at it on that basis. But I think the issue there is that profitability is one aspect of what the rating agencies look at, and sustainable profitability is an important pull-up point because the issue is not so much the amount of profit as the amount of capital that you are generating, because unless you can generate additional capital through profits you cannot grow your business and so you cannot issue more loans. So it is very important for a bank to be able to grow, and the best way it can grow is through generating its own capital. The piece that you do not retain, of course, is distributed as dividend.

Senator XENOPHON —Earlier today the Australia Institute gave evidence that their analysis of the 2009-10 annual reports of the four major banks indicated that interest expenses fell as a percentage of both assets and liabilities. Their contention was that banks are spending less money on interest in 2010 than in 2009 and that that is inconsistent with evidence that costs are rising. That was their proposition. I think they gave figures that indicated a drop between 2009 and 2010. For instance, for the ANZ, interest expenses as a share of assets dropped from 3.4 per cent to three per cent and interest expenses as a share of liabilities dropped from 3.7 to 3.2 per cent.

Mr Smith —Yes, but that does not reflect the mix—

Senator XENOPHON —Yes, but I just wanted to get you to respond to that.

Mr Smith —If you look at the actual numbers, they have significantly increased, year-on-year.

Mr Hodges —Might that also reflect the fact that interest rate levels overall are different, and so you are not comparing apples and apples? In a sense, those numbers are reflective of the absolute level of interest rates, not margins in the market.

Senator XENOPHON —So you are saying that it is not reflective of margins, even though the overall costs seem to be somewhat less?

Mr Hodges —Well, if interest rates were another 10 per cent higher, then your overall numbers would be grossed up and if they were much lower they would be grossed down, I presume. I have not seen their report but it does seem that that may be a factor.

Senator XENOPHON —You may want to take the question on notice in the context of the assertion made by the Australia Institute.

Mr Smith, you talked about the issue of customer empowerment in your opening statement—having more transparent fees, better disclosure requirements and simple, transparent products. I am not singling out ANZ, but is that an acknowledgement that things could be done better in terms of consumers?

Mr Smith —Absolutely—yes.

Senator XENOPHON —And you understand the level of community disquiet or concern in relation to banks? I think your colleague, or your fellow CEO, Mr Clyne on Monday told the inquiry that, essentially, the nation’s banks had themselves to blame for their low community regard and had confused the public with their previous policy of linking interest rates to the Reserve Bank’s official cash rate instead of funding costs. Is that a fair comment of Mr Clyne’s?

Mr Smith —I think it is. The fact that the banks have moved their interest rates in line with the RBA adjustments has led to the understanding of the public that there must be a connection, and that is quite understandable. So I think we have created that problem for ourselves and I would agree with him.

Senator XENOPHON —I want to make sure I get the context right for this; context is very important. On 29 October in the Financial Review an article by Marcus Priest and Matthew Drummond refers to you saying that you flatly rejected the need for another bank inquiry. Was that in the context of this inquiry or a Wallis type inquiry? Given what has transpired in the last few weeks and what has been announced, do you think there is scope for a more comprehensive inquiry into the financial system in the context of what has occurred?

Mr Smith —I hope that this inquiry actually presents the facts and indeed can make some views and judgments based on fact, which will hopefully clear up a lot of the misunderstanding around the whole issue. Whether or not we require a further inquiry I think depends very much on the findings of this committee, but if such an inquiry was called for then of course we would partake in it.

Senator XENOPHON —I want to touch on the issue of Mr John Symond from Aussie Home Loans. You may be aware of his evidence, which was reported widely today, and his criticism of the package and the whole issue of securitisation. I think you have said that securitisation is a drug we should get off.

Mr Smith —I am talking about banks more than—

Senator XENOPHON —Mr Symond’s evidence was that the advent of Aussie Home Loans and other non-bank lenders increased the competitive pressure in the 1990s in the context of the home loan interest rate market. Do you see a role for a Canadian type setup? You commented earlier, but do you concede that the advent of Aussie Home Loans and other operators made a difference and was a factor that increased competition in terms of that alternative access to funds?

Mr Smith —Yes, but I think what we have to look at is where does competition come from. The trouble with banks is that they are very conservative things, they are very traditional, they do not normally look at differences. What John Symond did was bring some innovation to the market, and perhaps the model now needs to be adjusted a little bit. But I actually think that where we should be looking is at what technology will bring us: what is going to be the change that technology will bring which will allow new entrants into the market without the infrastructure that the banks have and all the baggage in terms of the massive amounts of infrastructure we have?

Senator XENOPHON —Does that mean in the same way that Qantas has Jetstar as a low-cost carrier, the ANZ would be looking at a different product in the marketplace?

Mr Smith —Let us look at a good example, ING Direct. You have got a bank which is basically internet-based, it does not have any branches and therefore is providing a service with a tiny amount of the cost that we have and therefore can be much more competitive. I think other such situations will occur. You have got Virgin airline issuing a credit card. These are the sort of things that may well happen.

Mr Hodges —On the technology side, clearly all the banks are trying to invest in technology but the bigger you are in fact the more disadvantage you have in some of these areas because you are less nimble and you have a lot of legacy platforms that you have to connect everything with. So to some extent the technology is supporting competition coming from the smaller players, the more nimble players, and we have seen that across parts of the market. I think the switch into online banking has been quite dramatic. We have introduced mobile banking tools and technologies; others will follow. So the way we do banking in another 10 years could be quite dramatically different from what we do now, just as we would not have anticipated 10 years ago the way things happen in this market. I think that will leave an avenue open for other competitors who we currently do not know about to enter the market.

Senator XENOPHON —Hence the question whether, in the same way you have legacy airlines having offshoots, that was something on the agenda.

Mr Smith —Absolutely.

Senator XENOPHON —My final question relates to Basel III. Of course you will not know what the final rules will be and what has been negotiated internationally by APRA but there is concern. Senator Bushby has been asking questions on this at Senate estimates for many months. Is there a concern that with the tightened liquidity requirements and with the other requirements of Basel III—whatever they will be it seems there will be tighter requirements in part to respond to what has occurred overseas—will there be an element of Australian consumers having to pay for the sins of other banking systems when ours has been very strong and robust? In other words, and to put it colloquially, will we be copping it in the neck to basically make up for the sins of others?

Mr Smith —I do not know whether we will cop it in the neck but we will certainly feel an effect.

Senator XENOPHON —It might be a whack on the back of the head.

Mr Smith —Yes, a whack on the back of the head. I think we have all become used to the fact that there will be a bigger capital requirement and I think the banks will get better at managing the products which are capital light rather than some of the more traditional products. They may need to change the product mix which they sell. Liquidity is much more difficult because there are still ideas floating around and it is unclear where that will go but if banks are required to hold massive amounts of additional liquidity in low-yielding bonds for repo purposes in times of trouble that would be a major cost. So far, APRA and the RBA have done a great job in pushing back some of the international ideas which are done for international reasons but are actually there to protect London as a financial centre, or New York or wherever. There is a lot of national interest in this.

Senator XENOPHON —Sure, but there will be a flow-on effect, presumably. Is the bank considering that Basel III has the potential to increase the cost of finance in Australia?

Mr Smith —There is potentially a flow-on effect but until we know exactly what has been agreed it is going to be hard to—

Senator XENOPHON —Can you give a range? Would it be between 50 basis points and 100?

Mr Smith —I have no idea. We thought we had got the capital issue resolved last month and then every regulator in the world went back to redefine what a risk asset was. So suddenly what was known became unknown.

Senator XENOPHON —So it is a known unknown!

Mr Smith —Indeed. I think we have some way to go in this debate. All I would say is that the understanding of these issues by APRA, the Reserve Bank and Treasury means that we are across it. It is a question of making sure that we push back against the vested interests of other countries.

Senator XENOPHON —So we will not know how big a hurdle Basel III will be until next year?

Mr Smith —No, we will not, but it is going to be progressive. It is not going to happen overnight; it will take many years. Basel II took 20 years to implement. The Americans started it and at the end of the day said that they did not want to do it anyway, so the rest of the world confirmed apart from the US and therein lies a story. So Basel III still has quite a long way to go.

Mr Hodges —Your point was whether we would be affected here because of what happened offshore. We are already seeing that through wholesale funding costs and all those sorts of things which reflect the repricing of risk that has gone on globally. There is no way the Australian system, as it currently stands, can be isolated from what is happening in global markets.

Senator XENOPHON —Including the rollover of European sovereign debt next year.

Mr Hodges —Yes, and I think there are real reasons to have some concerns about how that will play out through the course of next year.

Senator PRATT —Mr Smith, you have acknowledged that the ANZ and other banks necessarily stepped in to fill the gap during the global financial crisis. In turn, would you acknowledge that there is now, therefore, less competition in the market and that it is a legitimate objective to restore some further competitive pressure?

Mr Smith —I think you could take it two ways. First, you could look at it and say there is less competition. That is assuming that the major banks do not compete with each other—and I can assure you they do. It is quite brutal competition, frankly. The second is that the important part of that was that, even though these second-tier players left the field, customers, both consumer and corporate, were still able to access funding and that maintained the economic growth in the country. Had that not happened, had the banks not been able to step in, we would have had a real problem.

Senator PRATT —How important are sticky consumers? I imagine they are important. We have had some discussion of that.

Mr Smith —Sticky consumers? Literally?

Senator PRATT —People who will stay with your bank instead of taking their money elsewhere and constantly flitting around looking for the best deal. I imagine that is important, and that should not mean that a bank should not earn that stickiness or take it for granted.

Mr Smith —I think that is absolutely right. It is like respect. You have to learn respect; you cannot just expect it to come with the title or whatever. The issue around customers is about the experience they have with the bank, and it is that customer experience that we work so hard at. I admit we do not get it always right and we often do not get it a lot right, but we do try because without our customers we are nothing.

Senator PRATT —You are unsticking consumers by removing exit fees—in a good way, I would say, and I would hope you are creating sticky consumers—

Mr Smith —We hope they stay with us because they want to.

Senator PRATT —Yes, that is right. Do you think that other banks should also remove their exit fees?

Mr Smith —I think that the market dictates this stuff, so eventually there will be pressure for them to align themselves in the same way that we react to different competitive pressures. I think that it will happen but, as I say, we would have to work very hard at trying to maintain our customers. They have to want to stay with us.

Mr Hodges —I offer an example going back a number of years as often you can see how it plays out over a number of years. Our bank was the first to introduce the $5 account where you just paid $5 a month and you got your account. We had that in the market for about 18 months and we were winning good business in the market and then—this is back in the early 2000s—suddenly all banks were in there with some similar variant, something which was a low-cost, low-fee account where people came in. I think the way the market does work is that if someone gets a good product and it wins business or they take a fee off, as in this case, consumers notice this and if it is important to them they will react to it. If it is not important to them then they will be focusing on other things and they will use other products. So I think the market will sort that out pretty quickly.

Senator PRATT —Will the ANZ be charging other fees to make up for the removal of exit fees in any way?

Mr Smith —No.

Senator PRATT —Good; I was hoping that would be the answer. Has the ANZ spoken to the Treasurer or his office over the last 18 months about any of the elements that are included in the recent banking package?

Mr Smith —I think a number of these issues have been raised in conversations.

Mr Hodges —Covered bonds would have been one.

Mr Smith —Certainly covered bonds, yes; certainly exit fees.

Senator PRATT —I asked Mr Norris this morning to comment on the fact that his yearly package was equal to what 30 Australians would have to pay the CBA over a lifetime in order to own their own home and I think he missed the point completely. So can I ask you this, Mr Smith. Do you get to talk to ordinary mortgage holders very often? Do you appreciate the significance to them of the contract between the ANZ and them, to the wellbeing of themselves and their families?

Mr Smith —Yes, I do. I am very sensitive to it. I meet a huge number of our customers over a year. As I said earlier, these decisions to raise rates are taken with incredible seriousness. It is not something you would just do. Our customers are front and centre of everything we do and, of course, I have to be in touch.

Senator PRATT —We have had some discussion about Mr Hockey’s bill and you have said that it sounds very reasonable and would not present any issues for any major banks. Is your impression of Mr Hockey’s bill that it sounds very reasonable and would not present any issues for any major?

Ms Nash —That is not quite—that is in part, I think, what Mike said. The other thing that he said was that he would need to understand much more about what he might or might not be able to say. And the same view would apply to the government’s bill, and we have not had time to go through it in any fine detail.

Senator PRATT —Everyone is talking about the costs for wholesale funding as the big competition issue, and we have had lots of discussion about that—Mr Symond and Mr Naylor yesterday and banking groups. I think I read that the ANZ had a bond issue earlier this week. I wonder if you could give us a sense of what the pricing differentials are, in real terms. What pricing does a bank like the ANZ pay compared to Bendigo or similar?

Mr Smith —The pricing purely reflects the rating that the bank has. In fact what is slightly strange is that, even though the Australian banks—the major banks—are rated AA, we actually do not raise money at AA price; we raise it at a slight premium to AA. The reason for that is there is so much Australian paper in the market in relation to the size of the economy, and it is all Australian bank paper. So, in terms of the basis point difference at the moment—between AA and A minus—it would be, I think, at the moment, about 50 basis points. And that is a rough estimation.

Senator PRATT —How did the government guarantee on wholesale funds work for ANZ during the GFC? How much did you use and to what effect?

Mr Smith —We used the window when we had to.

Mr Hodges —It was from the end of 2008, so I think they came in on around the 12th or so for the domestic guarantees—12 October—and maybe the international one came in just slightly thereafter or around then. We used that up until about June 2009, and then beyond that we found that our investors were telling us that they would prefer to take normal paper from us with the higher yield that we would give them on unguaranteed paper rather than a guaranteed paper. Because we had borrowed the government’s guarantee or paid for the government’s guarantee it reduced the yield that they were getting. They became comfortable enough through 2009 that they would prefer to have our nonguaranteed paper rather than guaranteed paper because it gave them a yield pickup, and yet they felt comfortable with the risks. So it was probably only for about that seven or eight months that we used that. We have not used it since.

Senator PRATT —Does that mean you have a lot left?

Mr Smith —We do not have a lot. We probably have about $15 billion. It would not have been a lot. But that was, again, something we had to come straight off as soon as we could in terms of building the yield curve back in our own name. So far that has gone pretty well.

Mr Hodges —I see you are smiling at us saying we do not have a lot: $15 billion does not sound much, but $100 billion or so is our wholesale funding.

CHAIR —I am sorry. I smiled when you said $15 billion was not a lot but I understand that in the context of your overall funding it is—not in terms of average.

Senator PRATT —Given, I suppose, the level of taxpayer support and the role that that support has played over recent years, where do you think banks sit currently as good corporate citizens?

Mr Smith —To answer your second point first, I think that, as corporate citizens, we are extremely good. Our corporate responsibility model is one of the best. We have won the Dow Jones sustainability index for the fourth year running as the best bank in the world for this. I think that is high praise for an Australian bank. In terms of the taxpayers’ money, not one cent of Australian taxpayers’ money went into the banking system—not one cent. The government has received or will receive over $5 billion as a result of the guarantee scheme. None of those schemes have been called.

Mr Hodges —I think it is a question about taxpayer support. That could be interpreted as saying that the taxpayers provided support in a sense of financial support, which it has not. In fact the banks have paid for it. It is true that the sovereign, the Commonwealth, provided its use of its guarantee at a fee, which was very appropriate for the time, given the systemic risk that was in the marketplace. It was quite a scary time and I think they did the right thing exactly at the time.

Mr Smith —I think the way they structured that was clever because it was the right thing to do. It was not a giveaway; it was renting.

Mr Hodges —It put a deadline on it. If you looked at it from an issuer point of view, if I were the government issuing it, it also risk-adjusted it and said that those with the higher risk should pay a higher amount because it is a contingent liability for the Commonwealth and that is the way it was structured.

Senator PRATT —These are very interdependent relationships—Australians, their mortgages, the whole economy, the shareholders, the bank. In a sense, when we are here debating bank profits and the pressures on mortgage holders, we want to see as much pressure on banks as possible to be those good corporate citizens.

Mr Smith —Yes but, as I said earlier, we have four times as many deposit customers as we do mortgage customers who are benefiting by that increased rate. There is a lot of the community who are actually benefiting from this. As I said before, we are completely understanding of the importance of these decisions. We do not take it lightly. It is a very difficult decision to make to raise rates and it is one that is taken with all the facts in front of us.

Senator CORMANN —Mr Smith, I was interested in your quite categorical response to Senator Pratt’s question about exit fees and whether there would any replacement fees or any increase fees in other parts. You were quite adamant and said no. Does that mean that exit fees did not cover, in the past, an expense that you as the ANZ Bank incurred?

Mr Smith —Our retention of mortgages has been extremely good. We have been growing our mortgage levels above system for the last year despite being a little more expensive than a number of other offerers. That is often because of the quick decision-making process and the settlement process which is very well perceived in the market. Price, as Graham said earlier, is just one element in this, it is not everything.

Senator CORMANN —I understand that, but essentially you are saying that you can absorb the loss in revenue from the exit fees.

Mr Smith —We can because, as I say, we have to work hard to make sure that we do not lose.

Senator CORMANN —Sure—which means that, essentially, you were previously charging more than you could have. I guess that raises the question of whether there are other fees and charges across the banks that are the same.

Mr Smith —No, it does not, because there is always a cost of actually creating a loan or of repaying a loan. There is inevitably a cost.

Senator CORMANN —But you are still going to incur that cost and you are not going to impose a fee.

Mr Hodges —We only recoup that if the person left within the four years.

Senator CORMANN —Do you expect that nobody is going to leave?

Mr Hodges —We are going to back ourselves to hang onto our customers.

Mr Smith —This is the management challenge and you need a few aspirational challenges.

Senator CORMANN —Is that a change from what you would have done before, Mr Hodges? You would have always tried to hang onto your customers, I would have thought. That is just business as usual.

Mr Hodges —We had one of the lowest exit fees in the market, so, in a sense, it was easier for us to give that up than it would be for some of the other institutions. It is still something which we recognise from a philosophical point of view. It was something that we could do and say that we stand to not handcuff our customers to us through this sort of fee, but we will win the customers’ business and keep them.

Senator CORMANN —Sure. I will not dwell on it much longer, because we are short of time. In your opening statement, Mr Smith, you mentioned that you have four times as many deposit customers as ANZ mortgage customers. What is the overall value of your deposit account versus the overall value of your mortgage account?

Mr Smith —In terms of?

Senator CORMANN —In terms of dollar value. You are talking in terms of the number of customers. I would be interested to know the value of the mortgage business versus the deposit business.

Mr Smith —It is obviously going to be very different because your average deposit is much less, about $30,000, whereas your average mortgage is about $260,000.

Senator CORMANN —That is why I am asking you the question. I got the impression that you were trying to suggest that, really, it is all swings and roundabouts and—

Mr Smith —No. What I was saying is—

Senator CORMANN —there are many more deposit holders, so why do you worry about mortgage?

Mr Smith —Say you are a pensioner and you rely on dividend income and some bank deposits and you do not have a mortgage. Only 30 per cent of Australians have a mortgage, so there is a whole part of the community that also benefits. That was the point I was making.

Senator CORMANN —That is subject to all the limitations that we have in the tax treatment of deposits and what an attractive investment that may or may not be in that context. I am just indiscriminately rushing through a series of issues in the interests of time. The chairman of the ACCC, Graeme Samuel, has expressed—and I am quoting from some background that is in front of you—that the banks are publicly commenting on how they are planning on increasing their rates, which is effectively providing comfort to the big four that they can increase without facing any competitive pressure. That of course goes to the issue of pricing. I see you shaking your head. Do you want to make a quick comment on Mr Samuel’s claim?

Mr Smith —I understand what he is saying, but I go back to the point earlier about money being a commodity. It is very difficult not to comment on where rates are going. I have my view, and the bank has its view, but is it right or wrong? We do not know. If you could advise me what the Aussie dollar is going to be next month, I will listen to you and maybe I will agree with you or will not—

Senator CORMANN —I would not listen to me, if I were you, to be honest! I am sure you have got much better people to listen to than me.

Mr Smith —It is right to be able to have an opinion on these things. Any of these comments, certainly from my perspective, were not meant to be priced signalling. I do not care what the other banks do as long as we can remain competitive.

Senator CORMANN —But when you make your announcements in relation to rate changes, is there a first-mover advantage or a first-mover disadvantage from your point of view? Are you essentially providing the meat for the market and providing cover for others?

Mr Smith —If we are talking about variable mortgage rates, to be candid, to move first takes a bit of bravery because you really ‘cop it’, to use your expression.

Mr Hodges —In the back of the head!

Mr Smith —Well, everywhere. I would say that that is a very politically sensitive one.

Senator CORMANN —Politically sensitive for the banks, you mean.

Mr Smith —In terms of the variable mortgage rate. And the reason that the variable mortgage rate is politically sensitive, I believe—again, going back to comments where the banks, frankly, have not helped themselves—is that there is no real and transparent reference rate which is a market rate. The rates that we create for the mortgages are what the bank thinks appropriate. That has worked very well for 20 years, but—

Senator CORMANN —For a long time you all increased at the same rate, and for a very long time it was in line with movements in the official cash rate.

Mr Smith —But there is quite a bit of difference now. I think you will find that there is also quite a bit of difference in the strategy of each bank and I think that that is also a healthy sign of competition.

Senator CORMANN —Just going to the government’s so-called competition reform package, I have got here an equity research paper from Credit Suisse, which you will be pleased to know continues to recommend ANZ among others. It makes the point:

If anything, major banks are perhaps long-term relative winners from the reforms …

Whereas, it states:

… regional banks were “not unequivocal winners from the reforms”.

That is, they are relatively more exposed to reforms to increased mortgage competition and also to the fixed IT costs associated with potential deposit account portability reforms et cetera. Is it your overall perspective that the major banks are better off as a result of the reforms announced by the government compared to the smaller banks?

Mr Smith —I think if you are trying to make the system more competitive then everybody in the system should be better off, shouldn’t they?

Senator CORMANN —The question is of relativities though. You have the four big banks and everybody else. I guess the question from a public interest perspective is whether there is going to be more competitive tension overall or whether we are just making the bigger banks bigger.

Mr Smith —Competitive tension comes anyway. That is what a market economy does. I think the danger is if you impose regulation that stops the free market working. When John Symond came into the market all those years ago there was a big gap in the market. He saw it and he went for it. Because of that he drove down the costs of mortgages.

Senator CORMANN —We have this analysis here from an organisation that makes it its business to assess the impacts of policy announcements like the competition announcements and it is making the point that, if anything, major banks are going to be better off over the long term compared to some of your other competitors.

Mr Smith —If they were, it would be marginal. I do not think there would be much in it. As I said, I would like to watch the market actually create that competitive tension because I think that is the proper place for it.

Senator CORMANN —We have had a lot of discussion around the tension between competition and stability, between competition and financial safety. The regulator says that their first focus is on financial safety while taking competition issues into account whereas organisations like Choice tell us that the balance has swung too much the financial safety way and we are not taking competitive issues into account enough. Do you think that our regulatory framework, including our system of prudential oversight, has contributed to a concentration of banking among the four large banks, making it too difficult for smaller players?

Mr Smith —No, I would not say that they have gone out of their way to restrict competition. In fact, I do not think they see that as their brief. That is not their brief; their brief is to maintain the stability and strength of the financial system.

Senator CORMANN —Understood. There is a balance and a tension, which everybody agrees, and if you take the regulatory requirements to the nth degree then larger businesses are going to find that easier to handle than smaller businesses and it will create barriers to entry. Do you think the balance is right or have we contributed to a concentration?

Mr Smith —I think you can always reduce the amount of unnecessary regulation. I think regulation should be good regulation and should not be onerous on the customer. I think in opening an account and transferring an account the amount of documentation that we are required by law to make sure that the customer complies with is onerous. There is all this additional regulation that comes in. The key to regulation is good supervision of the regulation. I think that is where Australia has done well. I think the more regulation you put in, the worse the competitive environment gets, particularly if you pass legislation that makes people do things which are not necessarily thought through.

Mr Hodges —Just on your continuum of entire competition versus entire safety, I think we sit somewhere in the middle there. We are not at either end of that I believe. You just have to look back a few years to when there were a number of bank operator players in the market here who were in some difficulty to see that it was not overregulated. We saw a number of products operating in this market that had built up in the boom, some of which we did ourselves—low doc lending and things like that—which actually proved to be not particularly great banking. So there were opportunities for us to push very much down the competition line. I think the market overall has said that some of that stuff that was done in the early mid-2000s really was not particularly good banking. You have seen a move back from that. I do not think that in that continuum we are in a difficult space at the moment from a regulatory point of view. There is access to the market.

Senator XENOPHON —This morning Dr Richard Denniss from the Australia Institute in his evidence noted that in a robust competitive environment it would not be possible for costs to increase and profits to increase at the same time. That was his assertion. The question he posed, which I guess I am posing to you now, is how do you explain higher wholesale funding costs with record profits? That is the nub of the debate I think. How would you characterise that tension between the two?

Mr Smith —I think he is looking at the wrong things. I think you should look at your revenue and then decide how much you can spend. You can spend as much as you can afford effectively. That is what it comes down to.

Senator XENOPHON —But in terms of general economic theory: if costs increase and there is a strong competitive market you would not expect profits to increase as well.

Mr Hodges —No. In the banking system in the last couple of years one of the big important swing variables had been provisioning for bad debt. What we saw in 2000 to 2008 or even 2009 was a very big lift in the cost of provisions or the cost of bad debts, which the banking system wore. What we have seen in the last 12 months is that that level of provisions has come down and as a result of that the banking profits have flipped back up a bit from what were lower levels. In fact, they can coexist. Provisioning was a very big factor.

Mr Smith —Also was revenue. Revenue increased as well.

CHAIR —I thank the officers from the ANZ Bank and also Hansard and the secretariat for assisting us today in Canberra and in Sydney over the last two days. The inquiry is adjourned until 24 January.

Committee adjourned at 5.02 pm