Narev takes safety-first approach

It is the perfect tone to set when consumers of banking services are again being spooked by the political and financial turmoil in Europe.

The experience of the global financial crisis in 2008 demonstrated clearly that there was a customer flight to safety in banks around the world, and CBA ranks in the minds of the public as the most secure.

Analysts are less concerned about the bank's strategy to cope in the event Greece leaves the eurozone. They are far more focused on the earnings effects of the stricter capital requirements on banks set by regulators in Basel 2.5 and the move to Basel III.

Declaring himself less of an expert than others on the ramifications of Europe abandoning Greece, Narev suggested it would not have the same impact as the global financial crisis.

He said the difference this time around was that financial institutions were prepared for the event. When Lehman Brothers collapsed, it took world markets by surprise.

"An organisation like ours, and there would be many others around the world, plans for that scenario and knows what would happen," he said.

But global instability played well into Narev's focus yesterday on portraying CBA as the local bank prepared to play it safe.

It will fight the others on technology and customer service, and says it will sacrifice some margin in return for solid funding.

The quarterly results announced yesterday showed earnings were sluggish as the bank took a hit to its net margin, which fell in the three months to March.

But how much more pain is CBA willing to take? Its decision to pass only 40 basis points of the 50 basis point cut by the Reserve Bank a few weeks ago suggests it is trying to claw back some margin.

The fact it cut its deposit rate by the full 50 basis points will also assist in that cause, and suggests the bank's margin position should improve this quarter.

It now has the second most attractive variable interest rate in the market for borrowers, almost as low as National Australia Bank.

However, CBA's three competitors managed to recoup more from the recent interest rate movements because they passed on even less of the RBA's rate cuts to customers. And when it comes to assessing which of the banks will improve earnings through the management of interest rate margins, it is all about the relativities.

CBA clearly wants to fund new loans through deposits rather than accessing too much in the more volatile wholesale markets. Although it did undertake a new wholesale issue during the period, its new loans remained mostly funded through deposits.

This is more a function of the fact there is little loan growth in Australia for any of the big banks, and CBA boasts the biggest share of the deposit market.

The less impressive earnings story from CBA in the quarter, relative to its competitors, is also a reflection of less reliance on trading income, which tends to improve in most banks during periods of volatility.

Selling the longer-term stability story and the tight costs strategy is hard in this environment where investors view banks as utility-type stocks with solid and stable earnings rather than those that will experience any meaningful growth over the short to medium term.

CBA has a couple of advantages in this respect. Its risk settings are fairly conservative, it has a "safe" brand and it has already invested heavily in IT, which could put it in the best position on costs and customer satisfaction.

It now has to let the advantages of core banking improvements filter down to customer satisfaction. If this works, it will place plenty of pressure on the other banks to catch up.

But the jury is still out on whether more customer-friendly banking will translate into more customers.

The other leg to CBA's stability story is credit quality. Its total impairment expense in the quarter was a very conservative 18 basis points of total average loans, which Narev says takes account of its exposure to the recently collapsed construction arm of the building group St Hilliers.

Having issued an attack on the Gillard government for its industrial relations policy, BHP Billiton should not have been surprised that the union movement would fight back.

The counter-attack was especially tough, with unions accusing BHP of wanting to dilute safety in Queensland, arguing this approach had caused the deaths of 29 coal miners at the New Zealand Pike River coal mine in November 2010. "We condemn BHP's pursuit of safety deregulation that would transfer vital safety roles from qualified workers on the job to management," it said.

While the federal Workplace Relations Minister, Bill Shorten, took a more tame approach, saying the company's industrial relations problems stemmed from its ability to negotiate, the unions' response was near impossible to counter.