Finance Finance News Bank CEOs face big pay cuts
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Bank CEOs face big pay cuts

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The new tax could yield as much as $6 billion over four years, according to reports. Photo: The New Daily
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The chief executives of Australia’s big banks are facing big hits to their multi-million-dollar pay packages as sliding share prices take a toll on their performance pay.

With only a few weeks to go before the end of the financial year for NAB, ANZ and Westpac, chief executives at these banks face an uphill battle to avoid missing out on their 2015 bonuses.

Unless their share prices recover before September 30, most senior executives are likely to cop big hits to their performance pay.

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That’s because the bonuses of CEOs at these banks are tied to movements in share prices and overall returns to shareholders.

Commonwealth Bank chief Ian Narev was paid more than $8.3 million last year, and more than half of it came in performance bonuses.

ANZ’s Mike Smith collected $10.4 million – of which about 45 per cent was linked to rises in the company’s share price and dividends paid to investors.

It appears almost a fait accompli that Mr Smith’s pay will fall significantly because his bank’s share price has taken the biggest hit of the listed banks this year.

Getty
ANZ chief executive Mike Smith might be taking slightly less home this year. Photo: Getty

ANZ’s share price is now trading almost 20 per cent below its value of a year ago.

However, if the bank’s shares were to recover before the end of September there is a chance that Mr Smith might be able to limit the damage to his bonus payments.

Bank shares have been sold-off by investors in the last month amid heightened concerns over the direction of the Australian economy and the prospect of a severe correction in the property market.

Home lending has grown almost every year since 1992 and is one of the big reasons why banks are so profitable.

However, in recent months there are signs that the banks have burned off too much rubber in the lending industry’s sprint for home borrowers.

And at the end of this year and next it seems unlikely that top bankers will have much bonus pay to extend their pay packets to eight digits.

Why bank shares are on the nose

While some people might take wicked delight in knowing that bank executives are about to take a pay cut, flagging share prices also mean that customers are likely to share in the pain.

The banks are under pressure from the regulator, the Australian Prudential Regulation Authority, to put aside more capital for every dollar they lend.

Investors are being warned the boom times may be over.
Investors are being warned the boom times may be over. Photo: Shutterstock

They have already issued $10 billion worth of new shares to meet the new regulatory requirements and that has been a key factor behind the share price plunges of the past month.

Westpac topped up again on Thursday after completing a $1.3 billion capital issue.

The country’s top banking analysts, including Jonathon Mott at UBS, are warning investors that more big capital raisings are on the cards before June next year.

The other issue worrying investors is that there are signs that more borrowers are feeling the pinch of having to service high levels of debt.

ANZ indicated recently that it had suffered a slight increase in the number of non-performing loans in its Australian operations and this rattled some investors.

The slowing domestic economy also has them a little spooked because if growth continues to taper it would likely cause unemployment to rise and thereby trigger further rises in loan defaults.

A prolonged slowdown, of course, might also precipitate a property market correction that could have profound consequences for the profitability of the banks.

Although most of the top-ranked bank analysts believe that the sell-down of banking stocks is overdone, they are still disinclined to recommend that investors buy in to the sector.

To see how bank shares have performed in the last year, click on the owl.  

What this means for bank customers

Banks are already passing on the additional costs of meeting new capital rules to their shareholders.

Every new share that they issue dilutes the relative interests of existing shareholders, including your super fund.

retirees
Retirees are facing a dilemma over their super.

As more shares are issued, banks have to boost their bottom line profits just to maintain the same dividend they pay out on each share.

Investment housing borrowers are also paying the price in the form of higher interest rates and tighter eligibility criteria.

Most investment borrowers who have borrowed from one of the four major banks have begun paying an extra 0.5 per cent on their interest rate since the middle of August.

Depositors are also absorbing some of the pain, with rates on most online saver accounts and term deposits having been crunched to below two per cent in the past month.

Retirees looking to park their nest eggs in a safe place are now confronted with a frustrating dilemma.

Bank shares are volatile because of uncertainty over future dividends and bank deposit accounts offer returns only slightly better than inflation.

Retirees with a low risk tolerance might have no option other than to accept what the banks are prepared to dish out to them on term deposits.

If you’re able to lock your cash away for 12 months the following lenders are offering the best rates:

• Arab Bank Australia – 3 per cent
• Qld Police Credit Union – 2.95 per cent
• UBank – 2.95 per cent

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