Westpac emerges as Morningstar's top pick among the big four, after its peers were referred for potential criminal prosecution by the banking royal commission's final report.

The banking royal commission's final report is a "net positive" for Australia's major banks, delivering far less draconian recommendations than expected, says Morningstar.

Share prices of each of the major banks surged yesterday as investors and many bank executives breathed a sigh of relief after the report was made public on Monday evening.

At market close yesterday, share prices of AMP (ASX: AMP), Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC), National Australia Bank (ASX: NAB) and ANZ Bank (ASX: ANZ) were all up. Westpac's share price gained the most, up 8 per cent yesterday, while Commonwealth Bank's 5 per cent was the lowest of the group.

Among its 76 recommendations, the final report suggested the following changes to banking:

  • Mortgage brokers: Required to act in the best interests of the intending borrower, not the bank providing the loan
  • Mortgage brokers: should be subject to the same laws financial advisers must adhere to when advising clients
  • Remuneration: Borrowers, not lenders to pay mortgage broker fees. Lenders to be banned from paying trail commission to mortgage brokers
  • Misconduct by mortgage brokers: Australian Credit Licence holding brokers should be subject to the same sharing and reporting procedures as financial advisers, and be subject to the same processes of informing telling and remediating clients if misconduct is discovered.
NAB Thorburn

Morningstar has maintained its fair value estimates for the big four banks, AMP and IOOF in response to the final report.

"A lot of negativity had already been priced into bank share prices, with prices on average down approximately 15 per cent during the previous 12 months," says Morningstar equity analyst, Chanaka Gunasekera.

"Westpac Bank is our preferred major bank and looks to have come out of the royal commission better than peers."

Westpac stands out in not being referred to regulators for further misconduct investigations or potential criminal charges.

The lack of a forced structural separation of the banks' product manufacture and distribution activities – a potential outcome that had been most feared by the industry – is viewed particularly positively by Morningstar bank analysts.

They also welcomed the reports recommendations that should improve the overall level of trust in Australia's large financial institutions – including the removal of commissions and conflicts of interest and improved transparency.

"Both the final report recommendations and the cringeworthy process of questioning witnesses, will deliver better customer outcomes, particularly a culture of accountability and compliance," Gunasekera says.While noting there were no recommendations for criminal

proceedings against individual executives, he says three unnamed financial institutions could face criminal charges. "These are likely to be National Australia Bank, Commonwealth Bank, and AMP," Gunasekera says.

He believes National Australia Bank's chairman Dr Ken Henry and CEO Andrew Thorburn will likely lose their jobs, in response to the "scathing" attack launched by the commissioner Kenneth Hayne QC.