Lex Hall: Hi, I'm Lex Hall and welcome to the special edition of "Ask the Expert." I'm with Morningstar's senior banking analyst, David Ellis. He's about to retire. He's spent a long time at Morningstar. So, I thought I'd have a chat today about his thoughts of the banking industry and where he sees it going in Australia.

G’day, Dave.

David Ellis: Hi, Lex.

Hall: Thanks for your time for this special edition. And congratulations too on such a long and distinguished career.

Ellis: Thank you.

Hall: I'm going to throw some questions at you, which are totally unprepared. So, feel free to take some time and gather your thoughts. Obviously, a great topic over the last 18 months, let's say, has been the Hayne royal commission – which the government was reluctant to have called. How do you sort of rank that in terms of challenges that the Australian banks and Australian lenders have faced over the last – in your time?

Ellis: Yeah. Well, other than market challenges, so I think the royal commission, the Hayne royal commission has definitely been the biggest challenge that the banks have faced and are facing. We have seen significant market macroeconomic challenges. We saw in the GFC, at the end of 2007, particularly in 2008 and the first part of 2009, where the banks in Australia were under a lot of pressure. But when you compare that to the global situation where a lot of big global banks got absolutely decimated during the GFC and required government bailouts – we didn't have that in Australia. So, the four major banks in Australia maneuvered through the GFC quite comfortably, even though it was tough with no government bailouts. The government did provide a guarantee to the banks on wholesale funding, which the banks paid a fee to the government for. And if we go back to the last recession in Australia, in the early 90s, in '91 and '92, that was a tough time for the major banks and the economy. We had two of the current four major banks under a lot of difficulty during the last recession.

So, getting back to the royal commission, yes, it's been the biggest challenge. It's far reaching. It will take a number of years. Most embarrassing or most of the risk that came out of the royal commission was the culture and the governance within the banks.  There's obviously been – for too long – there's been a focus on profits before customer outcomes, which has benefited shareholders, investors, handsomely. But obviously, the focus is now more on customer outcomes. The banks have still, of course – the boards still have an obligation to their shareholders, the owners of the businesses, but there's now far more – there's going to be more aggressive regulatory response. There's obviously high compliance costs, high regulation costs. When you put that or compare that to the bank profitability, each year, the four major banks in total make about $30 billion after-tax. So, it's a big number, that customer cost, but it hasn't weakened the strong franchises that the banks enjoy.

Hall: I just going to switch the order of my questions in light of what you're saying. I suppose the other sweeping change that you've overseen is the advent of online banking and the effect that the internet has had on banks. And we've talked about in an earlier video about Matt Comyn of CBA talking about simplifying the bank and getting it back to its bread and butter services. What do you think about all these? And what effect will they have, do you think, all these so-called neobanks, banks that don't have the infrastructure of the big four, and they operate online, and they have a very different way of talking to customers?

Ellis: So, it's hard to look ahead 10 years to see what the landscape is going to be for the major banks. At the moment, the – and the last several years, the banks have been invested – four major banks have been investing substantial money and time and effort into modern or new technology, product innovation…

Hall: Trying to call themselves fintechs as well.

Ellis: Exactly. Investing in some of these startups as well.

Hall: Yeah.

Ellis: I mean, obviously, this range of neobanks or online banks is growing. There's more and more. I don't know if I'm just being old-fashioned or a dinosaur or got my head in the sand, but I just can't see them at this stage making much impression on the banks' strong market position in Australia.

For the next few years, maybe 5 to 10 years, I think a lot of people would overestimate the impact in the short-term, and underestimate the impact in the long-term. So, I think longer term, the banking scene will be very different 10 years' time. There will be a lot more focus on individual customer needs, a whole of customer needs, with products and services tailored to individual customers, leveraging massive investment in data and customer analytics, and open banking.

Hall: OK. And finally, sort of a difficult one. Who do you reckon is the best CEO you've seen?

Ellis: Well, Gail Kelly at Westpac Bank was what I would say the most inspirational CEO. She has or had the ability – when she was talking to a large group of people, she has the ability to make you feel that she's talking to you as an individual, and not to the thousand people that are in the room. So, she's got this really good personal, great personality that connects with people. And I think a lot of people respond to that.

As far as looking over the last 10, 15 years, there's a range of CEOs. They've all been good in some respects and demonstrated weaknesses in other. I think, the Commonwealth Bank, if we go back two or three CEOs, I thought Ralph Norris did a really good job with modernising the Commonwealth Bank, particularly he initiated the core banking system modernisation project.

Westpac, I think, has been really well run. I mentioned Gail Kelly, but I think Westpac has been very well run over the last decade. National Australia Bank has been the biggest disappointment over the last decade. They've had a series of CEOs that have not really delivered. And ANZ, you know, we had, of course, former CEO, Mike Smith. He was there for a considerable time, and he was the architect of the ANZ's Asian strategy. And that, with hindsight, that didn't work. And at the moment, I think ANZ and NAB, their senior management, their CEOs, their boards have probably let them down to some degree. Whereas I would say that Westpac had the best senior management for the last decade or so.

Hall: OK. Dave, congratulations on an illustrious career.

Ellis: Thank you.

Hall: We thank you for your service.

Ellis: Thanks.

Hall: It's been a pleasure working with you.

I'm Lex Hall for Morningstar. Thanks for watching.