AUSTRALIA

Australia's four biggest banks - Westpac,  ANZ Bank, National Australia Bank and the Commonwealth Bank of Australia - hold AUD 1.4tn (approximately USD 960bn) in assets which are equivalent to around 140 per cent of Australia's gross domestic product, and also hold around 80 per cent of Australia's loans. These banks largely avoided the fallout from the 2008 financial crisis but Bloomberg reports that their profitability has "plunged" due to the Australian central bank cutting interest rates to record lows and the inquiry into financial industry misconduct. Reports suggest that these banks have recorded the worst results in a decade with "big falls in profit, reduced dividend payout and a challenging outlook". Brian Hartzer, chief executive of Westpac, said that this low interest rate, combined with strict new regulation has created tough conditions for Australian banks. KPMG notes that the four main banks made a combined cash profit of AUD 26.9bn in 2019, down 7.8 per cent from 2018.

In 2017, an inquiry into whether conduct by financial institutions fell below community standards and expectations was launched by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, as reported by the Australian Government. On 1 February 2019, the Commissioner, the Honourable Kenneth Hayne AC QC, issued a final report, which contained 76 recommendations (the “Report”). 

The findings in the Report prompted the Australian Prudential Regulation Authority ("APRA") to tighten lending standards, raise capital requirements and increase executive accountability. In July 2019 it also announced plans to reform remuneration arrangements with deputy chair, John Lonsdale, noting that the existing remuneration system did not encourage the right behaviour from financial institutions. 

Australian corporate watchdog, the Australian Securities and Investments Commission ("ASIC") has taken a "why not litigate" approach in light of the Report which has resulted in an increase in court actions against financial institutions. 

On 1 October 2019, the Reserve Bank of Australia cut interest rates to 0.75 per cent. Governor Philip Lowe suggested that an extended period of low interest rates may be needed to increase employment (unemployment hit 5.3 per cent in August 2019) and to address inflation with the hope of bolstering consumer confidence to revive household spending. Despite this, the Australian retail, construction and property sectors continue to show pockets of stress, with a number of retailers and private developers entering into insolvency this year.  

In July 2019, the APRA ordered Westpac, ANZ Bank and National Australia Bank to increase their capital holdings by AUD 500m (approximately USD 384m) each. The Commonwealth Bank of Australia added AUD 1bn to its capital buffer in May 2018. These increased capital requirements and additional regulation have led to a significant increase in activity by alternate capital providers in the Australian market as banks are less likely to lend to assets that are low or non-income generating (such as land banking and construction funding). MaxCap Group, an Australian and New Zealand commercial real estate debt specialist which has AUD 3.98bn under management, suggests that the funding gap in the real estate space will reach AUD 50bn by 2023.

SPECIAL THANKS

We appreciate the assistance of Timothy Sackar and Madeleine McCloy of Clayton Utz with the following discussion of Australian law, regulation and practice.