How election will affect major banks

The federal election results to date have potential implications for the Australian banking sector through the following factors: 

The ALP, Greens and the Nick Xenophon team have been calling for a royal commission into banking. It is possible that the LNP yields to calls for a banking royal commission in order to appease the Greens and a potentially hostile Senate. 

If a royal commission into banking was to be conducted, the outcome in our view is likely to be increased regulatory oversight of the banking sector and stricter corporate governance requirements. This may ultimately add to operational expenses for the major banks. 

A royal commission may also cause major banks to think about divesting their insurance businesses if they are not already thinking along these lines. NAB is actually already in the process of selling 80 per cent of its life business to Nippon Life. 

Last Thursday Standard and Poor’s revised the rating outlook on the Commonwealth of Australia to negative, from stable, given the uncertainty created by the Federal election. As a result, they have done the same for Australia’s major banks. 

If this was to lead to an actual downgrading of Australia's AAA sovereign credit rating, it could result in a downgrade in the credit rating of the Australian major and regional banks. The major banks are all currently rated AA- with a stable outlook. Bank of Queensland and Bendigo & Adelaide Bank are both rated A- with a stable outlook. 

If the major banks do experience a one notch downgrade in their long-term credit ratings, then they are likely to experience higher costs of wholesale funding. 

In our view, the outcome of the federal elections creates plenty of uncertainty for the Australian banking sector.  However in practice all will not remain constant and the banks are likely to deal with any adverse impact of higher funding costs by re-pricing their loan books.  Unfortunately this does however potentially mean higher interest rates for consumers.