Listen to a recording of Alan Kohler's interview this afternoon with Commonwealth Bank CEO Ian Narev below.
THIS IS AN UNEDITED TRANSCRIPT
AK: Ian, a pretty solid result, but of course the share price has fallen quite a lot. Now, Eureka Report’s subscribers are all individual investors and I’d say that just about every one of them holds CBA shares. I know you don’t want to give… you wouldn’t want to give commentary on share prices and so on, but can you… I mean would the yield now kind of back above five per cent with the share price having fallen, are you able to give some guidance as to how you see the next kind of year or two?
IN: Well Alan, obviously it’s a bit early to judge the market reaction today because our shares are going to be in trading while we complete this placement, but for the point of view of our retail shareholders, everyone obviously has to always take their own view of the prospects for the bank. Our suggestion to people always is to think about the long term and to understand that it’s really important for us, given that we’ve got 800,000 households who own the shares directly. Many of them are your subscribers and your viewers and your readers. We do our best always in the environment we’ve got to keep the share price as good as it can be and keep the dividend up. Some aspects of that are outside our control, but as a management team focussing on the long term returns for our shareholders is very, very important.
AK: So are you able to give us any commentary on why you think the share prices, not just of CBA but of all the banks, have fallen in the last couple of months?
IN: Yeah, I think there are a couple of things. Number one, first of all, you’ve got to bear in mind that… as I said, look at these things for the long term and when you see them fall for a couple of months, but if you look at how they’ve gone for the last two years or three years, they’ve obviously gone extremely well. And at different points in a stock’s trajectory the market readjusts in response to different pieces of news. From what we can gather from commentary on the market, there are ongoing questions about the macro economy both in Australia and globally. That influences some investors. There are ongoing questions about the impact of regulations, some of which I think we provided pretty clear answers to today. In relation to what some other banks have said, there have been questions about credit quality and where we are in the credit cycle. And all those things get factored in to people’s assessment of what the value of the stock should be on any given day or week.
AK: And obviously one of the factors has been the requirement for more capital which you’re responding to today. What are you saying about that and how that’s going to affect your return on equity?
IN: We have said that is a clear strategic priority for the Commonwealth Bank for a long period of time. Being clearly strong on capital is important. And the thinking behind the entitlement offer that we announced today was to make sure that even with the change in regulatory environment, we will remain strong. We’ve wanted to do that in a way which makes sure that all our retail shareholders are well looked after and have the opportunity to either buy the shares at a discount or have a valuable right in their hands. In terms of impact on profitability, if people look at the entitlement offer which I would encourage any of your shareholders to do, you’ll see that the proforma impact on the return on equity is about 140 basis points, but that’s very much just a proforma statement showing if all other things being equal, that’s the effect of the… the dilutory effect of the capital. So we’ll just have to see how that plays out over time.
AK: But you and the other banks all say that you want to have a strong capital base and of course that’s the case, but there is a sense that you’ve had to be forced in to this by APRA telling you to have more capital, so how do you respond to that?
IN: We do as a board, as a management team make sure we’ve got very strong levels of capital and we’ve also got a regulator who is a) responding to some of the recommendations in the Financial System Inquiry and b) responding to developments around the world over the last few years which are still in the aftermath of the global financial crisis. And even though Australian banks were very strong and resilient during that period, we understand that global events caused people to wonder whether or not banks need more capital, so APRA is doing its job which is being forward looking and looking after the strength of the banking system and we’ve responded to that.
AK: Do you think that the Commonwealth Bank needs more capital?
IN: We look at capital in a number of different ways. And as a board, if we look bottom up, if you like, at the risks in the business, the likely scenario is do we think we’re holding enough capital? Absolutely, we do. And on any scenario we model pretty much we’re happy with that. The other thing we’ve got to bear in mind, though, is we’ve got regulatory expectations, funders’ expectations, market expectations and we have to make sure we listen carefully and we’re responsive to that. So, as we said today, we were very happy with the levels of capital that we already held, given our view of the likely risk scenarios in the market, but we’re responding today to changes in the regulatory environment and we’ve shown how we’re prepared to do that.
AK: I mean obviously another way to increase your capital would be to reduce the dividend which obviously would have a bigger… it would probably have a bigger impact on your share price than rising capital, so you wouldn’t do that, but are you prepared to say that you would never reduce your dividend and would instead raise capital if you needed to?
IN: What we’ve said today is we’ve repeated our dividend policy is that we will normally aim to pay out between 70 per cent and 80 per cent of our profits and in saying that, what we’re really saying is we recognise that the dividend is a really important part for our shareholders on why they want to own Commonwealth Bank shares. It is important and you understand this better than most, Alan, that a dividend on an equity stock is just that. It’s not an annuity and of course there are circumstances of any institution is in particularly hard times where you need to divert from the dividend policy, but we would never do that lightly. We don’t yet foresee circumstances where we’re going to have to do that and so we’ve said today we can expect to keep that policy in place.
AK: And, in fact, Telstra which is also seen as an important income stock spent some period of time borrowing to pay the dividend. Can you imagine that you would do the same thing?
IN: Oh look, in a sense as you point out today, Alan, I mean we’re taking capital on the one hand and giving capital back through a dividend on the other hand, so this is always the way companies of the structure of our balance sheet work. We really understand the importance of the dividend and we’re committed to doing our best to keep it up. Our number one priority always has got to be the long term strength and resilience of the institution. If we ever felt like in order to keep that, we would have to pay less of a dividend, we would be prepared to do that, but that is not the circumstance we’re staring at today.
AK: The Reserve Bank is starting to reduce or has again reduced its forecast for the Australian economy. There’s quite a bit of concern around about the situation in China and what an impact that’s going to have on the economy here and unemployment here. Are you starting to see any signs of economic softness in your loan book?
IN: No. If you look at our results today, one of the clear features was in both household lending and in business lending, credit quality has held up really well. Now, we did point out that in personal loans in Queensland and Western Australia we’d seen a little bit of an uptick in 90 day arrears that flowed through a little bit to provisioning, but that’s pretty minor in the context of the whole balance sheet. As we sit today, we are not seeing any signs of endemic credit weakening. Now, that, as you know, Alan, can change relatively quickly. We can only comment on what we’re seeing in the book at the moment and at the moment the book is looking pretty solid.
AK: One final question, we’ve been doing some work in Eureka Report interviewing and talking to peer-to-peer lenders, are you concerned about the impact potentially long term of peer-to-peer lenders and more generally of fintech and, you know, the challenges from payments operators and so on?
IN: We are concerned about it and we’re inspired by that competition to be as good as we possibly can be. I mean in peer-to-peer lending and payments in all sorts of different areas, there are really innovative business models coming up that are providing more competition and that are good for customers. We take them extremely seriously. And the challenge we’ve set ourselves is we’ve got one of the great financial institutions franchised in the country, good customer base, good brand, good distribution. If we are inspired by these competitors to innovate to the extent of our capability, then we believe we can continue to be very successful.
AK: Thanks very much, Ian.
IN: Thanks, Alan. Take care.