New fintech entrants have put Australia’s major banks under pressure, but they will never threaten the banks’ ability to repay their bonds, says Spectrum Investment Management.
In a report compiled by Spectrum principal Damien Wood, he argued technology, while “driving disruption in many industries”, would not topple “long-standing dominant players” in the banking industry.
“At Spectrum we see the long term success of a commercial bank is built on three pillars: low costs; distribution and marketing strength; and effective risk management,” Mr Wood wrote.
“The large Australian banks have a funding cost advantage over most in Australia.
“Their 'AA-' credit ratings are among the highest locally and, indeed, the world. This allows them to borrow from bond markets at a relatively low cost.”
On this basis, it would be difficult to beat big banks on costs, Mr Wood stated.
Newcomers, who are able to enjoy the transition to digital or remote banking, nonetheless face “several challenges in competing with banks on distribution”, as big banks had already secured a dominant market share of customers and had the resources to invest in technology as well as service and product delivery.
“The newcomers’ customer interface has to be markedly better to entice someone to switch from a bank – all things being equal,” Mr Wood said.
“Customer inertia can also be strong.”
Major banks also had the advantage of “very strong” brand awareness on their side, Mr Wood added, as well as “track record and breadth of services to win the business”.
“Successful financial institutions signal stability and longevity to the wider community,” he said.
“For a safe, cyber secure and convenient place to leave your excess cash, banks beat fintechs.”
Finally, big banks had stronger risk management than fintechs, with the former benefiting from “experience garnered from generations of bankers passing down lessons”.
The latter, according to Mr Wood, were “flourishing” in “high risk lending”.
“When the credit cycle eventually turns for the worse, we will see which lenders managed to have priced their risk appropriately,” Mr Wood wrote.
“We back the major banks to be doing a better job than fintechs in risk management.”
Looking towards the future, Australian banks “may” feel more pressure, but this would not be enough to overthrow their hold on the sector.
“Sure, the big four will lose customers due to disruption … Banks could also lose market share. This could impact on bank equity valuations,” Mr Wood concluded.
“Overall, though, we see disruption as a modest threat to the credit risk of major Australia banks.”