Michael Pascoe Interviews Outgoing Commonwealth Bank CEO David Murray Following A Bumper Result.

Eureka Report associate editor, Michael Pascoe interviews outgoing Commonwealth Bank of Australia chief executive David Murray after the bank announced a 55% increase in annual net profit to $4 billion.

MP: Under the old accounting standards a 55% net profit rise of nearly $4 billion dollars. Under the new accounting standards a still 31% rise to about $3.5 billion dollars. So David Murray, are you getting out at the top?

DM: I don’t look at it that way. I actually think that the industry’s still got very strong momentum because of the economy, mostly because of the very strong terms of trade which I expect to continue with global commodity prices. There is a latent 2 more percentage points of growth in the Australian economy and because so much of this is in infrastructure and business investment for export then it’s going to need support of the banking industry to grow with it.

MP: But such a jump in profits...this is the last time we'll see this happen isn’t it?

DM: Well, remember that the jump in profits was engineered because of the shape of the Which New Bank programme (a five year restructuring plan) so I think maybe the underlying profit is more interesting to look at where we allow for investment returns in the wealth management business and the Which New Bank costs and that showed 13% which against the industry is a good result.

MP: And you’re still promising 12% compound annual growth in EPS for the next three years?

DM: That’s right.

MP: Beyond that though, does it get harder. If all the low lying fruit has been picked, does that make it harder for banks?

DM: I have a more optimistic view about what’s possible, mainly because I’ve seen what’s possible with this programme we’ve been running. Amazing creativity. New possibilities with IT systems. New possibilities with engaged people and sales management systems. Increasingly good outcomes projected for the wealth management businesses. I think the financial system will have a different shape but I think that there’s good potential for the banks within that.

MP: Good potential for a healthy industry overall, but you have one maybe two new competitors moving in. Beyond 2006 it's a cloudier future isn’t it?

DM: Well I just '¦ this sort of competition’s been with us for a long time now. It’s only because the industry here is so competitive that it’s lifted so far in its capability in global terms. Bank management in Australia is very highly regarded internationally so we’ve actually built in the capability to deal with competition and to be more and more inventive going forward and I think that will sustain the industry.
MP: Specifically margins held this last year, they are in for a squeeze though down the track. You don’t expect margins to stay at this level do you?

DM: They held on a point to point basis. They’re down a bit on average basis. No, as I said today I expect that we’ll see continuing falling margins in line with experience in the last few years and that’s indicative of the competitive environment.

MP: And if HBOS (the parent company of Bankwest) follows the sort of track it’s had in the UK could that be a sharp fall all of sudden in a couple of years time?

DM: Well if HBOS wants to throw capital at Australia for low returns it’s up to HBOS. I don’t know about the other banks, but with the Commonwealth Bank they’ve got a very ready competitor.

MP: In the wealth management business is there also a long term trend in place to squeeze fees. In other words is it possible that it won’t be as profitable as it has been in the past.

DM: That trend is there. As you know our focus is on the retail side of that, particularly with First Choice (CBA's employer superannuation fund) where the margins are competitive but good and the more important thing though is the rate of growth in wealth management versus the probably rate of growth in (traditional) banking. Wealth management is going to have faster growth for us and our positioning there is fantastic and we’ve beat the cost of capital on what we bought in the year 2000. (In 2000 CBA bought the former Colonial funds management group which has now been rebranded as First Choice).

MP: From the investor’s point of view they’ve had a great ride with Commonwealth Bank. You’re promising higher dividends next year. Is dividend growth sustainable beyond 2006?

DM: Well that’s the target. That’s the only sort of thing that we target when we build our strategic plans. And I think with simpler processes, engaged people, very creative teams and (incoming CBA chief executive) Ralph Norris’s own capabilities I think it should be.

MP: Plans for share growth? Are you willing to talk about the period beyond 2006?

DM: No, I think there’s a trend for less specific guidance. The problem with highly specific guidance is that it tends to detract from the truth which is that there’s a whole set of factors out there for every company in the economy - and every bank in the banking system - that can change things and the problem with guidance is that only the top line guidance gets repeated, not the qualifications that should go with it so we prefer, as many companies increasingly prefer now, not to give highly specific guidance.

MP: We’ve been doing this annual results interview for a long time. (Murray has presented the CBA results for over a decade). You’ve been saying there’s tough competition out there since the first day you were in the chair as CEO and I think I’ve been saying oh, not really, the cartel’s been pretty kind. Today you come out and say the 'four pillars' (The government policy to prohibit mergers between any of the big four banks) is a good thing. Have we come full circle?

DM: Well if our customers aren’t happy we’ve got nothing to work with and there’s no point ignoring the reality of the concentration ratio of the major banks in Australia and it’s up to the banks, any banks who want to merge, to get out and demonstrate why it would be of benefit to customers. Now that may be possible but there’s no point having a one sided argument about it.

MP: It’s very academic though isn’t it. Politically there’s no way in the world the government would allow any change in the four pillars policy.

DM: Except that I think we have a very capable Treasury in Australia. People who are good at analysing the industry and trends in the industry and I think the thing to watch is what from a public policy perspective'¦ what is the preferred positioning of Australian run and prudentially oversighted banks in the Australian system and in the international system and that’s the balance of the argument has to be looked at as well.

MP: The one thing that’s really changed is that this time the competition does look like being serious from HBOS against the four pillars.

DM: Well that’s fine. I mean competition’s good. That’s why the four pillars I think has had a good spin off for customers of banks and I see competition and good customer outcomes as a great thing.

MP: David Murray, thanks for talking to us

END