Hayne has got it right, and the CBA as well
Proof bank profits don’t have to be at a cost to customers
TWO days after banking royal commissioner Kenneth Hayne’s report, the Commonwealth Bank produced a “beautiful set of numbers” – precisely beautiful in the context of his report.
The CBA is the biggest and most important financial institution in Australia.
It is critically important – not just for the overall economy but for every single individual Australian – it continues to work well and we can trust in it.
What the Hayne process, and even more its outcome, told us – and indeed much more directly told the CBA and its peers – is that the CBA (and every other bank and financial institution) must at the same time “work well”
specifically for its customers and to earn their trust.
The CBA numbers show that it can successfully do both – that it can work well for shareholders and for customers. To make “good” – and I use the word very deliberately – profits do not mean it has to screw or otherwise disadvantage customers.
It is important for everyone to understand the “new normal” revealed in the CBA detail.
This is a “new normal” for the bank as an operating business, as an investment for shareholders and what it delivers to customers and the trust they need to have in it.
This is a “new normal” that doesn’t only reflect the – selfinflicted – pain as a consequence of previous bad behaviour.
It also incorporates the tougher prudential requirements imposed by APRA (both structural and operational) and the state of the economy.
The profit was essentially steady – a combination of low, single-digit business growth and a four-point drop in its interest margin, with provision for bad and doubtful debts essentially unchanged at historically minuscule levels that are functionally near zero.
The profit delivered an underlying return to shareholders around 14 per cent.
That is – in my opinion – around where it should be, getting that balance right between shareholders and customers in the broader economic context.
In the “good old days” (of riding roughshod over customers?), CBA used to gener- ate a return closer to 20 per cent.
If it was still doing that it would have made closer to $7 billion than the $4.7 billion declared.
The CBA numbers directly validateCommissionerHayne’s approach and his report’s outcome.
The lower profit is not only better for customers, it is fundamentally more appropriate in the “new normal” of low interest rates and low inflation.
Bluntly, it would usurious to make 20 per cent when you can borrow the money you need to make that figure at three per cent.
Youmight think 14 per cent is still too high. Except this is as “good as it gets” for a bank – there are plenty of customers and they are servicing their loans.
The CBA numbers confirm Commissioner Hayne got the balance exactly right in holding the banks to account for their past bad behaviour, while also – even more critically – sustaining that for the future and still having a healthy banking sector.
The CBA numbers also knit neatly with the Reserve Bank’s analysis of the economy and its position on future interest rate movements.
The numbers indicated – at least up toChristmas – an economy still ticking over despite the sharp fall in the property market over those months.
CBA chief executive Matt Comyn confirmed that to me.
This will bear very close watching, as will whether the soft state of retail sales through the key Christmas-New Year period proves a harbinger of a slowing (or worse) economy.