Meet the executives next in line to run the big banks

Further, as seasoned bank directors point out, being seen as the frontrunner is a mixed blessing. Bank boards frequently eschew the favourite candidate in favour of lower-profile, well-qualified executives.

This means that at ANZ, Carnegie should expect stiff competition from Antonia Watson, who runs the bank’s New Zealand operations and Mark Whelan, who heads ANZ’s institutional banking division.

At NAB, Irvine will be up against some strong contenders, including Rachel Slade, who runs the bank’s retail banking operations, and Angela Mentis, who formerly ran Bank of New Zealand, and how now heads the bank’s digital, data and analytics division.

Even Sullivan isn’t guaranteed to succeed Comyn at CBA,

Michael Vacy-Lyle has lifted his chances of becoming the bank’s new boss, given his success in improving the performance of the business bank to the point where it now banks one in every four Australian companies. Other strong internal candidates at CBA include Vittoria Shortt, who heads ASB Bank in New Zealand, and Sinead Taylor, who is chief operations officer.

At Westpac, the latest reshuffle – which will have Jason Yetton take over retail operations, while Miller, previously the head of institutional, takes the helm of the business banking division – has upended the succession calculus. Most observers believe King will stay in his job for another two years, giving the Westpac board time to evaluate the respective performances of Miller and Yetton in their new roles.

And while most bankers believe the highly regarded Miller is still the most likely person to succeed King, they concede that Yetton – who was apparently as surprised as everybody else at his shock elevation – could be a formidable candidate if he can make progress in solving two of Westpac’s thorniest problems, its antique IT system, and its failure to properly integrate St George, which it acquired back in 2008.

Seasoned bank directors point out that all the candidates for a bank chief executive role must undergo a gruelling selection process. Candidates undergo a series of interviews with smaller groups of bank directors, before being required to make a formal presentation to the entire board.

“You find out a lot about people when they’re pitching to the board to be the next CEO”, says the director of one bank who spoke only on condition of anonymity. “Things come out in that process.”

As they decide on the next generation of bank CEOs, directors will be looking closely at all the candidates to see which ones best understand the bank’s challenges, and have ideas as to how best to respond.

Successful candidates will need to be able to point to a track record of delivery, and also to demonstrate their ability to manage and communicate. But even when they’ve achieved the coveted goal of becoming a big four bank boss, they’ll have little chance to kick back and enjoy their success. Indeed, most of the country’s top bankers believe that the challenges facing a big four bank boss have never been tougher.

One of the country’s most highly regarded bankers points out that the economic climate is much less benign, and growth much weaker.

What’s more, stagnant income growth will make consumers even more price-conscious, and even more motivated to compare the home loan rates offered by different banks, and to push for better deals. The new and distinctly unpleasant reality for bankers is that there’s no longer any such thing as an absolutely safe customer relationship. At the same time, banks’ home loan margins will face more pressure as consumers turn to mortgage brokers to hunt for the best deal. And that’s a major problem for the big banks, given their huge dependence on home loans.

To date, banks have been able to use rapid growth in their home loan books to offset the impact of skinnier margins. The willingness of households to saddle themselves with huge amounts of debt, combined with soaring house prices, has made it relatively easy for banks to expand their mortgage lending. But, the top banker points out that this process is nearing its end. House prices won’t continue to rise as quickly, especially since Australian household debt, relative to income, is already at nosebleed levels.

David Murray, who ran CBA between 1992 and 2005 before becoming the chairman of the Future Fund, agrees that the economic backdrop is becoming more challenging. “The macro environment will be significantly different, with the possibility of stagflation and lower credit growth, with mortgage market competition threatening returns”, he tells AFR Weekend.

What’s more, he says, new leaders of Australian banks are also likely to confront the issue of “over-regulation and a less flexible industrial system, making productivity gains harder to achieve”.

Doug Nixon, the banking and capital markets lead at EY, says “the market that the industry is facing into now is one where we’re unlikely to see strong growth for a long time”.

“We’ve got a situation where credit system growth has slowed dramatically, and that’s a challenge for the major banks given their domestic focus,” he adds.

As a result, Nixon says, “one of the most significant challenges for any incoming chief executive will be looking for growth opportunities in the more static financial conditions ahead”.

Slowing credit growth translates into pressure on bank earnings, as net interest margins – the difference between how much banks earn on their loans and their funding costs – get squeezed.

“We’re seeing more intense competition which translates into downward pressure on fees and interest rates and origination costs for credit products. We’re also seeing more competition on the deposit side”, Nixon says.

“Many analysts think that [margins] peaked in the first or second quarter of the 2023 financial year. And this is in the context of [margins] that are still at very low levels historically.”

Shrinking margins

They may be at low levels in historical terms, but margins are likely to keep moving lower. As one of the country’s top bankers points out, home loans have now become a commodity product, and “margins in commodity products invariably shrink once markets stop growing”.

To counter this inexorable squeeze on profit margins, the next generation of bank chief executives will have to find a way to keep costs under control, at the same time as they improve their customer service to try to generate some degree of loyalty.

“You need to focus on competing effectively,” says EY’s Nixon. “You have to look at where you can gain operational efficiencies as well as looking at where you can take out costs ... you have to be very focused on the efficiency, profitability angle.”

There’ll also be unprecedented pressure on the next generation of bank bosses to discover new growth opportunities.

“Individual banks are more likely to continue to push into sections of the market where they haven’t been as strong previously,” says Nixon. “One trend in international markets that hasn’t manifested here is that a number of the big overseas players have made a big push into wealth to great success. The majors here have moved in the opposite direction, carving out their wealth and financial advisory businesses.”

But when they come to choosing their next chief executive, bank directors will not only want someone throwing up innovative ideas to increase revenues but also a candidate who understands systems, and is comfortable with technological innovation. In addition, they’ll want to appoint someone who can persuade investors of the need to set huge chunks of capital aside for the IT investment that will be required in the coming years, as artificial intelligence becomes more central to the banking process.

“There will be some very big winners out of this, and some very big losers”, one of the country’s most highly regarded bankers says. “I don’t know how the smaller banks can cope.”

Nixon agrees. “A big question for any new chief executive will be where is the best place to invest capital, not only when it comes to searching for growth, but also in handling competitive pressures and streamlining costs in an inflationary environment.”

Tech challenges

The next generation of bank bosses will also need to come up with strategies to fend off even more aggressive competition from non-bank competitors, particularly the big tech companies, in the payments system.

Apple’s iPhones are already being used for 80 per cent of smartphone payments in the country, and the non-bank players are increasingly targeting the systems used by small- and medium-sized companies.

“Banks have to compete with big tech by being very proficient with technology themselves, not just by responding, but trying to anticipate,” says a leading banker.

“Because the lesson with big tech is the first mover advantage: once people adopt a particular technology, it’s much more challenging to get them off it.”

But even beyond the immediate commercial threats, the next generation of bankers will confront a broader range of challenges.

According to Murray, these include “elevated risks from high household indebtedness, overpriced housing, and complex IT systems with cyber risks.” And he also points out that the next generation of bank bosses will probably be navigating a more difficult political environment.

“They will need deep experience as commercial bankers to be able to articulate, and follow through as leaders, the central role of banks as sound institutions, free of political suasion, in which depositors, shareholders and the community can have confidence”, he says.

So, has the job of being the boss of a big bank become more difficult?

“Yes”, replies EY’s Nixon “The current generation of bank leaders came in at the start of the [financial services] royal commission, and that was extremely difficult for the industry to face, and would have generated a lot of stress.

“The challenge for the next generation is fundamentally different. It’s economy-driven, and it’s driven by digitisation and technology advances which are sweeping across the financial services sector.”