Aus bank results: lots of paddling below the water line against strong currents.

• combined cash earnings down 2.5 per cent to $A29.6 billion
• net interest margins up a just 1 basis point to 2.03 per cent despite a lot of activity on pricing and balance sheets
• average return on equity (on a cash basis” down 194 basis points to 13.8 per cent
• a 40.2 per cent increase in bad debt expenses
• growth in average Tier 1 capital to 11.9 per cent

Apart from capital growth, in theory making banks stronger and certainly in line with what regulators are driving, there was not much great news for investors. (And even the capital growth weighs on ROE because the E is growing faster than the R.

" What all banks will do with wealth is critical"
Andrew Cornell, Managing editor, BlueNotes

The more complicated story of the results season was not so much the macro forces, which in general were well known – low revenue growth, higher bad debts, higher capital, more focus on costs – than how the individually banks are restructuring or refocusing or reshaping or re balancing – all descriptions used.

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The bank chiefs were reluctant to expand on ROE targets. For one, they are politically charged. In Australia there has been strident scrutiny of bank profits. For another, the equity part of the equation remains unknown as global regulators are still setting capital standards. But equally, while there was a consensus even a couple of years ago that bank ROEs needed to be above 15 per cent to attract investors, there is no such consensus today.

The argument for higher ROEs are investors demand them if banks, leveraged institutions, are to stack up on risk-return basis. Returns though, given banks are leveraged plays on economic growth, are likely to be constrained. To the extent banks make money on interest margins, ultra low interest rates hit profits.

But investors are also trying to gauge just how much safer banks are today, with increased capital and other regulatory changes, and hence how much lower a return (with lower risk) they are prepared to accept.

While there is always a lot of noise in the immediate aftermath of results, compounded this week by the US election, the flash reaction has been investors are reasonably satisfied or at least have already priced in those developments.

The underlying analysis though is more around how banks are responding. Take this bank for example, ANZ. In the run up to last week’s profit, the bank announced the sale of retail and wealth portfolios in five Asian nations and some restructuring and other non-recurring (“specified”) expenses and at the result the end of a review into Australian wealth assets, including life insurance, which will result in the business being run very differently and perhaps sold.

Then this week a new head of technology, Gerard Florian from Dimension Data was announced, to complement the earlier appoint of Maile Carnegie from Google and drive the bank’s transformation into a digital world.

ANZ chief executive Shayne Elliott noted while this was a rapid pace of announcements, more were to come. Indeed, even when he was chief financial officer, Elliott had flagged a relocation of capital away from lower returning businesses and a rejig of the Asian footprint.

The wealth decision too, while new in detail, was not unexpected given many banks have started to reconsider the best strategy in this space.

When Australian banks bought into wealth at the turn of the century, they as a group paid very high multiples for businesses which were expected to capitalise on the shift of savings away from bank deposits towards superannuation and the growing insurance needs of an ageing population.

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While the focus may be on bank capital, bad debts, revenue, just what all banks will do with wealth is critical. And it is not like there is a “wealth” business which means the same at every bank. Wealth encompasses insurance, financial advice, the manufacture of products like superannuation and managed funds, fund management platforms, in varying mixes.

The Australian banks embarked on very different approaches initially. CBA bought Colonial but that business had been based around two star individuals, Chris Cuffe and Greg Perry, who left. Meanwhile, CBA built up its own platform which was a strong performer.

National Australia Bank bought MLC from Lend Lease. MLC was a “manager of managers”, it didn’t manufacture. But then NAB decided manufacturing was attractive and even attempted to buy wealth companies including AMP and AXA Australia.

Westpac Banking Corp sold a personal finance business, AGC, in order to buy a wealth business, BT, later than the others moved as even then the view was still wealth had greater growth options than traditional lending.

ANZ had built its own business, including stockbroking, in the 90s but then had a series of alliances and joint ventures with companies like Frank Russell and ING before buying ING out of a joint venture in 2009.

Announcing the latest review, Elliott said banks had a competitive advantage in distribution but not manufacturing. Life insurance, in particular, is a scale business and while Australian banks are large they are dwarfed by the global giants like Allianz.

Indeed the right model – and returns – for Australian ventures has never emerged. Should banks manufacture or just distribute? How do you manage the reputation risk with financial advice?

Some banks have had success with individual funds, some with distribution.

But predictions in the early 2000s that wealth should grow to around 20 per cent of earnings were never fulfilled.

Even at the peak, highest contribution was around 18 per cent for CBA. Most of the time, the contribution of wealth has been below 10 per cent – fine if the business is low capital, efficient to run and not causing brand images.

That hasn’t been the case. And to be fair, very few banks around the world have successfully executed a bancassurance or allfinanz model. The one that springs to mind, Mellon Bank in the US, is now almost no longer a bank.

So how the wealth story plays out, not just at ANZ but at all banks, will be fascinating.

As PwC noted in its review, the ANZ move “does not mean that all banks will, or should, follow suit. But as they look to become more connected and tailored to the myriad needs of a customer, they may need to release direct ownership of parts of the value chain’.

And the other huge, below the waterline, strategy is the digital transformation necessary to be a successful bank in a digital world.

“With 17 per cent or $6.2 billion of expense (excluding employees) in 2016 related to technology, we expect the banks to take more and more partnership approaches to innovation, infrastructure and distribution,” PwC noted, “reducing the organisational footprint to create more flexibility and access the very best of others’ developments.”

That story is just beginning.

Andrew Cornell is managing editor of BlueNotes.