Australia's big four lenders have long dominated the country's A$4.7 trillion ($4.9t) banking sector. But as they struggle to rebuild their reputation after a Royal Commission inquiry that exposed widespread misconduct, they face an unusual threat to their cosy oligopoly: cashed-up foreign rivals.
HSBC, which is traditionally viewed in Australia as a bank for expatriates, is one of a number of overseas rivals investing and winning share among locals in one of the world's most profitable banking markets.
Following an aggressive push into retail banking, the UK-listed lender expanded its mortgage book by 37 per cent to A$17.9 billion in the year to the end of April. This comes as Australia's big four — Commonwealth Bank of Australia, National Australia Bank, ANZ Bank and Westpac — are struggling to grow or are even shrinking.
Dutch lender ING Bank has established a foothold and amassed a mortgage book worth A$50b, while the consumer arm of US bank Citi has built up A$14b in assets since becoming one of the first foreign banks to be granted a banking licence in the mid-1980s. Rabobank has A$22.1b in assets, mainly linked to its strength in agricultural financing.
"Due to the Royal Commission inquiry there is far greater awareness among consumers that there is optionality in the market and it is causing them to consider competitors more," said Noel McNamara, acting chief executive of HSBC Australia.
"We've been delighted with the flows coming through the mortgage brokers, which have exceeded what we thought they may initially have been."
The year-long Royal Commission into misconduct in the financial services industry exposed greed, dishonesty and misconduct at the heart of Australia's banking system, in a searing report that was published in February.
Canberra has since moved to tighten regulation of the country's top four banks, and Rod Sims, chairman of the Australian Competition and Consumer Commission, told the Financial Times in February that the watchdog would act to "fix the cosy oligopoly" by making the big four "feel under threat".
One of the first initiatives to boost competition began on Monday with a pilot programmed to open up access to banking data. The scheme, which is scheduled to go fully live in February, requires the big four banks to share customer data with other companies, enabling consumers to switch accounts more easily. It also aims to encourage new product launches — something that has already been introduced across Europe.
Foreign banks in Australia still only have a tiny fraction of the market compared with the big four domestic lenders, which each have balance sheets totalling more than A$800b.
But the foreign challengers have been taking a rapidly growing share of the mortgage market in recent months.
"This is Citi's golden moment," said Alan Machet, chief executive of Citi's consumer bank.
"In the wake of the Royal Commission, the big four banks have a lot of change they need to go through. There's structural change, process change, policy change, technology investment and all of these things take time. I can't imagine how growth could be high on their agenda."
As well as expanding its retail business, Citi launched a commercial division in December targeting midsized Australian companies that operate at home and in international markets. Combined post-tax profits at the major banks fell 4 per cent to A$14.5b in the first half of 2019, according to an analysis by KPMG.
While the big four still control three-quarters of the banking market, there are signs that their vice-like grip on some segments is being loosened by encroaching foreign banks and homegrown digital rivals.
In the three months to the end of March, foreign-owned banks increased their balance sheets by A$37b while total assets held by Australia's big four fell by A$15b. Overseas institutions now control 14 per cent of the banking market, up from just under 12 per cent five years ago, according to data from Australia's prudential regulator.
The two biggest non-Australian retail operations have benefited. ING Australia reported net profit after tax of A$401 million in 2018, a rise of 15 per cent on the year before. HSBC Australia increased pre-tax profits by more than a quarter to $463m last year.
Australia's strong economy — the country has not experienced a recession in almost 28 years — and its stable regulatory and political system are a draw for foreign banks. Over the past year European lenders ABN Amro, Société Générale and Barclays have beefed up their Australian offices and reapplied for banking licences, which they gave up in the wake of the 2008-09 financial crisis.
Last week, London-listed Investec became the latest overseas bank to be awarded a local licence. These lenders are primarily targeting commercial rather than retail banking.
"In recent years, we've noticed significant and ongoing growth in our core focus areas, especially when it comes to renewables and infrastructure, including an increasing focus on wind, hydro and solar projects," said Pascal Sefrin, country head of SocGen Australia. He said the French bank was confident it could scale up its franchise.
The intensifying competition is forcing the big four to restructure. CBA's institutional division, which reported a 5 per cent fall in profit to A$580m for the six months to the end of 2018, recently merged its client relationship, structuring and product teams and refocused them on key themes including future cities and efficient supply chains.
"By thinking in that way, we are able to get closer to our clients, to stay relevant and to deliver more innovative solutions outside of traditional lending," said Andrew Hinchliff, CBA group executive of institutional banking and markets.
Foreign banks face a much tougher challenge building a presence in Australia's retail market, where the big four have the advantage of being able to provide a lifetime of services from school deposits through to services for retirees.
"Competition is probably at its highest point now in retail as the big four deal with the cost of the Royal Commission," said Mark Johnson, a former deputy chairman of Macquarie, Australia's largest investment bank.
"But I doubt whether this is the start of a big slide for the Australian banks as the natural rules of oligopoly will return in the next 12 to 24 months."
Foreign competitors would struggle to achieve a deposit base large enough in Australia to compete with the big four, said Johnson, noting that Citi — one of the world's most aggressive retail banks — had struggled to build a substantial business over more than three decades in the country.
There are already signs that regulatory pressure on Australia's big four could ease.
Following a sharp dip in house prices over the past 18 months, regulators rolled back tighter rules imposed on the major lenders' interest-only and buy-to-let mortgage books — enabling them to offer more competitive lending rates and sparking a mortgage price war over the past month.
CBA's Hinchliffe said Australian lenders would compete hard to defend their home patch. "We have more than 100 years of history of operating in this market — we were here before the overseas banks arrived, and we will still be here when they have gone."
Asian banks seek slice of Australia profits
Asian banks are also streaming into a market that has provided the big four with some of the highest profits in the developed world with returns on equity of 10 to 15 per cent over the past five years.
In December, authorities awarded Everbright Bank a licence to open retail branches, making it the fifth Chinese lender to set up in Australia.
Lending by Chinese banks to businesses in Australia has grown from almost nothing in 2006 to about A$35b in 2019 — about 3.6 per cent of total business credit and larger than that provided by North American banks.
Japanese banks, which have been in Australia for decades, are also expanding. In December, MUFG snapped up CBA's global asset management business for A$4.1b as Australia's biggest bank by assets cut its exposure to a unit associated with customer scandals.
Australia's planned A$100b pipeline of public infrastructure projects over the coming decade is a key focus for many of the foreign banks, including MUFG.
"Australia's need for capital aligns neatly with MUFG's core value proposition, which makes MUFG very relevant to Japanese, Australian and other international corporates seeking to invest in these sectors," said Drew Riethmuller, managing director of MUFG Oceania.
He said MUFG's expansion in Australia — the bank has A$28b assets — also reflected the fact that it was a core market for many Japanese companies, which valued the banks' ability to provide them with local services.
Written by: Jamie Smyth
© Financial Times