Banking royal commission: Is it time to buy AMP or NAB?

Earnest souls with a sincere interest in the country’s financial regulatory architecture weren’t the only ones closely following the banking royal commission’s hearings on Tuesday.

They were also being closely monitored by investors wondering whether they should pick up some of the slightly soiled stocks in the share market’s bargain bin – particularly AMP and National Australia Bank.

On the face of it, both stocks appear to be trading at mouth-watering prices. AMP offers investors a dividend yield of around 10 per cent (50 per cent franked), while NAB’s dividend yield is around 8 per cent (fully franked), giving the two stocks obvious appeal compared to, say, ANZ and the Commonwealth Bank, both of which are trading on a (fully franked) yield of around 6 per cent.

But before they load up on these stocks, however, investors want to know more about what approach those charged with shaking up these two strife-prone financial institutions intend to adopt.

NAB chairman, Dr Ken Henry got off to a slightly bad start on Monday when he admitted that it could take 10 years for the bank to fix its culture issues.

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And he provided even less reassurance for prospective investors on Tuesday morning when he was far from emphatic that the board’s risk committee was now better informed about problems that emerge in the bank’s operations.

“I certainly hope it has been fixed”, he said, although he noted there was always a “risk issue” whether problems were elevated to the board in a timely and appropriate manner.

But what is really likely to alarm prospective NAB shareholders is the chairman’s views on how to calculate staff incentive payments.

The issue arose in September 2016 when NAB’s chief executive, Andrew Thorburn, and chief risk officer, David Gall, argued there should be no risk adjustment to the size of the bonus pool that year, despite the major control failures that had emerged in the course of the year.

Thorburn and Gall argued that senior executives had put in a lot of work in improving risk related matters through the year, and that reducing the staff bonus pool would have an impact on staff morale. What’s more, they said, incentives should be aligned to shareholder outcomes.

Did Dr Henry agree with this latter point, senior counsel assisting, Rowena Orr, QC, asked.

Dr Henry saw this as an invitation to launch into a discussion on the philosophic underpinnings of capitalism. “The capitalist model is that businesses have no responsibility other than to maximises profits for shareholders”, he stated solemnly. That doesn’t mean that businesses can mistreat customers, because this is not in the long-term interests of shareholders.

But that view, he noted, “sees customers in an instrumental approach”, as a “means to an end, rather than an end in itself”.

AMP's acting CEO, Mike Wilkins, was much more modest in his reflections.
AMP’s acting CEO, Mike Wilkins, was much more modest in his reflections.

Wayne Taylor

This whole issue, he continued, was “something in NAB we’ve thought very deeply about”. And the bank had come to the view that its purpose was not to maximise shareholder returns, subject to customer and regulatory tolerance but rather to “maximise the outcome for customers subject to financial viability.”

Modest reflections

Needless to say, it remains to be seen whether NAB shareholders share Dr Henry’s enthusiasm for this “monumental shift”.

In contrast to Dr Henry’s lofty musings, AMP’s acting CEO Mike Wilkins was much more modest in his reflections on what had gone wrong in the financial giant.

There had been, he said, a “lack of clarity” about what was unacceptable, and “a lack of consequences that came from inappropriate behaviour”.

These two issues had been “complicated by the under-investment that AMP has made in risk and risk and compliance and governance systems which we are attempting to do now”.

So how did AMP intend to go about changing the culture, senior counsel assisting Michael Hodge, QC, asked.

Compared with Dr Henry’s tortured reflections, Wilkins offered a refreshingly simple approach.

“My concern has been to make sure people understand what is expected of them now” and that there are “appropriate controls to capture issues when they arise”, Wilkins responded.

“I think it’s important that the right tone is set by the leaders within the organisation and everyone is well aware of what is expected of them.”

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