By Gareth Vaughan
Those in and around Australasian banking have a subtly different outlook on key risks the industry faces than their international counterparts, and believes they're better placed to deal with them.
These are among the findings of the 2014 biannual Banking Banana Skins report from PwC and London-based think tank the Centre for the Study of Financial Innovation.
Collating responses received from 656 people in 59 countries described as either bankers, observers (analysts, consultants, academics, service providers) or risk managers (including regulators), the global survey ranked regulation as the biggest potential banana skin for the first time since 2006's survey. Respondents included 11 in Australia and six in New Zealand.
Coming in second and third, respectively, were political interference and the macro-economic environment. The last survey, conducted in 2012, had a top three consisting of macro-economic risk, credit risk and liquidity.
Although respondents in Australia and New Zealand also ranked regulation as number one, pricing of risk (how interest rates and fees are priced on loans) came in second versus sixth on the global list. Other key features were sales and business practices at fifth on the Australasian list versus 16 globally, and social media at seven in this part of the world, way above 19th globally.
'Mispricing risk is beginning to happen'
In terms of risk pricing, or mispricing, being a greater concern in Australasia than globally, PwC partner Sam Shuttleworth told interest.co.nz in a Double Shot interview this probably relates to competition in Australia and New Zealand and a low credit growth environment.
"To me that's all about competitive pressures amongst the banks," Shuttleworth said. "We are in a low growth environment and unfortunately when you are a corporate and you are wanting to renegotiate your banking package, there are winners and losers. And I guess those that aren't successful, I guess the concern is mispricing."
"The other way of looking at it from a consumer's point of view is that's just market forces, competitive pressures at play. And because we're in a low credit (growth) environment that's not a bad thing," Shuttleworth said.
The survey noted the pressures to misprice risk, ie under price it, identified by respondents included sluggish credit markets and growing competition. An un-named chief risk officer of an Australian bank was quoted saying mispricing "is beginning to happen due to low credit growth and...other pressures to have earnings against growing capital requirements."
In contrast an un-named chief risk officer of a New Zealand bank said mispricing was unlikely "given banks' core expertise in this area."
Social media's reputational risk
The greater concern about social media in Australia and New Zealand than in the global results reflects the quick adoption of the digital age by Australasian banks, Shuttleworth suggested, for both communication and services.
"The concern that has come through in the survey for the Australasian banks is more of a reputational risk. Understanding that while we're putting ourselves out there in this digital age and trying to do things fast, more efficient, we might get it wrong. And if we do get it wrong through the likes of Facebook, Twitter, we can't control the story. Stories go viral so quickly and there's actually a bit of a reputational issue here," said Shuttleworth.
Survey respondents were also asked how well prepared they thought banks were to handle the risks they identified. On a scale where five is the top score indicating well, and one the lowest score indicating poorly, the Australia and New Zealand participants scored 3.53 out of a possible 5, versus the world average of 3.04.
"I guess that reflects two things; One is the great Aussie-Kiwi attitude of can do, what's in front of us we'll deal with it, we'll get it right. So it's that number eight wire mentality," Shuttleworth said.
In the Banana Skins Index below the upper line shows the average score out of five given to the top risk, and the bottom line shows the average of all the risks. Both are down this year from record highs reached in the 2012 survey, suggesting anxiety levels are decreasing in banking for the first time in seven years, PwC and the Centre for the Study of Financial Innovation say.
Below are the top 10 banana skins as identified in the 2012 & 2014 world surveys, and those from the Australian and NZ respondents in the 2014 survey
|World 2012||World 2014||Aust & NZ 2014|
|Credit risk||Political interference||Pricing of risk|
|Liquidity||Macro-economic environment||Political interference|
|Capital availability||Technology risk||Macro-economic environment|
|Political interference||Profitability||Sales & business practices|
|Regulation||Pricing of risk||Technology risk|
|Profitability||Credit risk||Social media|
|Derivatives||Corporate governance||Shadow banking|
|Corporate governance||Criminality||Interest rate markets|
|Quality of risk management||Capital availability||Emerging markets|
This twelfth Banana Skins Survey was carried out during January and February this year.
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