Impact of big class action against Aussie banks seen as 'not material'

By Gareth Vaughan Despite reports of one thousand phone calls an hour swamping the company organising a major class action lawsuit against fees charged by Australian banks, analysts at Citigroup reckon the risks to the banks' earnings are not material. The Sydney Morning Herald reported litigation funder IMF Australia, the company behind the lawsuit, was getting inundated with calls from people who could potentially sign up to the action once news of the plan broke. IMF Australia, which provides funding for lawsuits in return for a cut of any winnings, claims 12 banks including the ANZ, Westpac, Commonwealth Bank of Australia (CBA) and National Australia Bank (NAB), have overcharged customers by A$5 billion in penalty and late fees. Australian media reports suggest a possible customer windfall of A$400 million before IMF Australia takes its fee. Nonetheless,  Citigroup analysts Craig Williams and Wes Nason have crunched the numbers and reckon the risk to the banks' earnings isn't material. "Depending on the level of customer participation in such a scenario, if successful, we estimate the cost to the industry would be (about) A$200 million to A$800 million." Williams and Nason point out the major Australian banks have reduced exception fees, or avoidable fees charged in circumstances such as when customers exceed the available funds in their account or are late in repaying their account, by about A$900 million in the past year. "This would put them on the front foot in terms of responding to any political involvement." Citigroup's analysis estimates ANZ potentially has between A$33 million and A$132 million at risk, or between 0.6% and 2.4% of the bank's 2011 financial year cash profit. CBA's exposure is estimated to be between A$52 million and A$208 million, or between 0.7% and 3% of annual cash profit. NAB A$30 million to A$120 million, or 0.5% and 2.1%, and Westpac A$46 million to A$184 million, or 0.7% to 2.7%. The number crunching is based on weighted 2008 Reserve Bank of Australia exception fees data by each bank's market share in retail - credit cards and deposit accounts - and business transaction accounts. Williams and Nason assume about 25% of exception fees charged represents reasonable cost recovery and they apply between 5 and 20% participation rates from customers in any class action. Meanwhile the analysts point out in a similar case in Britain the banks fought hard against the Office of Fair Trading (OFT) and ultimately proved victorious through an appeal to the House of Lords. The Lords ruled in the banks' favour last November, saying the charges fell within the core cost of a product and couldn't be assessed under unfair contract rules as the OFT was seeking to do. However the OFT was able to claim its campaign had led to significant improvements for consumers. And in Australia, Ian Rogers' banking newsletter BankingDay notes the only specific case on penalty fees resolved in Australian courts found in favour of the Police Credit Union. This was first published this morning in our Daily Banking and Finance newsletter, which is for our paying subscribers. Find out more here.