The relatively modest returns on investment resulting from the push by the major banks to dominate the financial planning and life insurance space may be testing the patience of their shareholders, according to a new analysis released by big accounting and consulting group Ernst and Young (EY).
The EY Banking Agenda analysis released this week points to the push by the major banks into wealth and life insurance over the past decade, but cautions that the process is far from complete and that the return on investment may prove problematic.
It notes that the banks are now among the largest providers of wealth and life insurance solutions in Australia and that although, in the long term, they remain well positioned to capitalise on financial advice and superannuation reforms, “they face some nearer-term challenges in these sectors”.
“Some commentators are beginning to question whether the banks can generate returns at the same levels as traditional banking,” the EY analysis said.
“A number of the majors are attempting to assess the impact of both regulatory reforms and changes in customer buying preferences on financial advice and distribution models.
“They are moving away from relying on external intermediaries to sell wealth and insurance products, to using in-house advisors and direct-to-customer and self-service offers, based on a greater understanding of individual customer needs.”
It said that a part of the problem for the major banks was that financial returns to shareholders in the wealth and insurance sectors had been challenged in recent years.
“Wealth manager margins have been impacted by the costs of regulatory reforms, lower fund flows and reduced investment returns due to weaker economic conditions. This has been compounded by lower margins from new superannuation and wealth products and continued competition. This margin pressure is expected to continue, rewarding scale and productivity,” the analysis said.
The EY analysis also pointed to the banks’ exposure to a struggling life insurance sector, saying three of the majors had life insurance operations in the top five life insurers in Australia but that “the life insurance industry is facing its worst conditions in decades, as shareholder returns fall significantly in the face of rising disability claims, worsening customer attrition rates and growing structural problems within the industry.
“Notwithstanding the above challenges, the banks’ wealth businesses are, in the main, showing improvements in performance. However, if ROE remains subdued, the patience of the banks with the wealth and insurance sectors may well be tested over the next few years,” it said.
