Banks Rush to Cut Penalties

By far the most interesting outcome of the recent reductions announced by the National Australia Bank, Westpac and Commonwealth Bank is exactly how much the industry has been fleecing its customers every time it has imposed one of these unpopular charges.

Thanks to the fact that publicly listed companies have to announce to the sharemarket any material changes to their financial positions, a great deal of light is beginning to be shed on the sums that have been flowing directly to the banks' bottom lines.

To that end, we have to be fair to Westpac and Commonwealth, which followed up their announcements of wide-ranging fee reductions (note, not abolitions) with statements to the ASX about the effect on their bottom lines.

In the case of Westpac, whose cuts from $40 to $9 in a variety of overdraft, dishonour, missed and late payment charges were the biggest of the lot, $210 million of an estimated $300 million ''lost'' revenue would be carved from its 2010 bottom line.

The Commonwealth, which undercut Westpac in some areas but didn't go as far in others, will give up $200 million of income and $135 million of cash profits.

Contrast that with NAB, which sought to be ''whiter than white'' by starting the ball rolling, but which, in fact, got rid of only one fee: its $30 overdraft charge, and only as it applies to its personal customers, not businesses like the other two.

NAB estimated that its move would affect $100 million of revenue but wouldn't disclose how much profit would disappear, presumably because it didn't want to reveal the real cost of imposing the fee and therefore just how much of a money-spinner the charges are.

However, thanks to its rivals and some quick back-of-the-envelope calculations by banking analysts at UBS and Deutsche Bank, we now have a better idea.

The admissions by the two biggest lenders, Commbank and Westpac, show that between 67 and 70 cents in every dollar earned from the penalty fee harvest was pure profit.

That represents about 5 per cent of Westpac's cash profits, which UBS now estimates will fall to $4.1 billion from $4.3 billion in the 2010 financial year, which starts on October 1.

Deutsche forecast that Westpac and its smaller sister bank, St George, would have taken a further $50 million hit if it had cut its myriad fees to almost zero and charged only the actual administrative cost involved.

As for the Commonwealth, UBS reckons that the country's biggest lender has been raking in $347 million a year from its penalty fees, from which it has been profiting to the tune of $243 million.

So based on those figures and the ones released by the bank, the Commonwealth is giving up 58 per cent of that part of its revenue and 55 per cent of the profit.

And since its penalty fee reductions don't apply to credit cards, it appears the bank is continuing to hold on to the most valuable part of that particular income stream.

If the same calculations are applied to NAB, then it has been making somewhere in the region of $55 million and $87 million on the $100 million of overdraft fee income and most likely towards the latter.

That leaves ANZ ,whose chief executive Mike Smith made it clear last week that it, too, would soon announce a package of new, presumably lower, fees.

Unlike the others, though, Smith said his bank's structure would be based on across-the-board fees for services rather than a differing bunch of individual charges on different accounts.

He used the analogy of car-park charges by which drivers could see exactly how long they would be billed for and at what amount: the implication being that if you go into overdraft of any account, customers would pay X, and if you miss a credit card payment you would pay Y.

It was probably the best explanation of why some kind of small charge is acceptable since, in most cases, there is a cost to the banks when people run up an overdraft or have a cheque dishonoured.

Nevertheless, that doesn't get away from the forecasts that ANZ, according to UBS, is scoring $290 million a year in exception-fee revenue out of which it may give up $200 million of profit if it cuts along the lines of Westpac.

Taken together, it's little wonder, then, that the banks have been so hooked on charging such exorbitant sums and why it's taken so long to wean the industry off them. Which leads us back to the original question: why now?

There's no doubt that consumer anger, political pressure and now real legislative power allowing customers to challenge the unfair nature of such fees, which comes into effect in January, have all played their part in the decisions to slash these charges.

If anything, the industry is learning the lessons from the days of closing hundreds of branches: that poor or bad customer service generates unpopularity and there's nothing worse than a gouging bank.

But the real reason is more likely to do with the fact that the big four have done so well out of the global financial crisis by increasing their market shares (and their revenue and profits to boot) that they can comfortably make up the $800 million of affected fee income elsewhere.

Yet again, size matters.

Source: The Sydney Morning Herald

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