Is wealth paying dividends for banks?
New research conducted by Ernst and Young (EY) has questioned the returns on investment being achieved from wealth management by the major banks.
The EY Banking Agenda report, released this week, drew upon the results of all the major banking groups to suggest that generating return on equity (ROE) remained a challenge for the banks due to the capital intensive nature of the business.
Importantly, the EY analysis has come less than a week following National Australia Bank's announcement that it will be selling 80 per cent of its life insurance business to Nippon.
Looking at the state of the wealth elements of the banking industry, the EY report said the banks' wealth businesses had benefitted from a strong performance in investment markets for most of the year and a lower Australian dollar.
It said that insurance premiums increased due to repricing but this had been offset in part by higher general insurance claims due to severe weather events.
As well, the report noted that the wealth businesses of the banks had been the subject of conduct issues related to the provision of financial advice and that while the customer remediation costs have been minimal, the major cost to the banks has been reputation.
"It is therefore no surprise that the Government's response to the FSI endorsed the recommendations regarding financial advice," it said.
Dealing with the challenge of generating acceptable ROE, the report said that expensive life insurance underwriting and manufacturing operations were likely to come under review as banks looked for ways to free up capital and improve returns.
"Divestments and strategic partnerships will enable the banks to focus on more profitable product distribution," it said.
The EY report said banks were also looking to implement more cost effective technology-enabled sales and advice in their wealth operations.
"With the rise of robo-advice, a digital financial advice revolution is underway that will help bridge the gap between what regular households are willing to pay for advice and what advisers are willing to charge for advice, and increase the consistency of advice."
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