Old virtues the new CBA theme

But sluggish quarterly results raise questions of how much pain the bank will absorb. UNDER the new management of Ian Narev (right), Commonwealth Bank is marketing itself as the solid and conservative player in the market with an eye to longer-term sustainable profit rather than short-term results. It is the perfect marketing tone when Australians are again spooked by political and financial turmoil in Europe. The experience of the global financial crisis in 2008 demonstrated clearly that in ...

But sluggish quarterly results raise questions of how much pain the bank will absorb.

UNDER the new management of Ian Narev (right), Commonwealth Bank is marketing itself as the solid and conservative player in the market with an eye to longer-term sustainable profit rather than short-term results. It is the perfect marketing tone when Australians are again spooked by political and financial turmoil in Europe.

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

Analysts were less concerned about the CBA's coping strategies in the event that Greece leaves the eurozone. They were 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 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, plan for that scenario and know what would happen," he said.

But global instability played well into Narev's portrayal yesterday of 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.

Its quarterly results yesterday demonstrated earnings were sluggish as the bank took a hit to its net margin, which fell in the three months to March 2012. But how much more pain is the bank willing to take? Its decision a few weeks ago to pass on only 40 of the 50-basis-point cut by the Reserve Bank to interest rates suggests it is trying to claw back margin.

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

It now has the second most attractive variable interest rate in the market for borrowers almost as low National Australia Bank. But CBA's three competitors managed to recoup more from the May interest rate movements because they passed on even less of the RBA 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 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 that little loan growth is going on in Australia from any major lenders and CBA boasts the biggest share of the deposit market.

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

Selling the longer-term stability story and the tight costs strategy is hard in this environment where the investors are seeing 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 undertaken the big investment in IT that could put it in the best position on costs and customer satisfaction.

Having spent the IT money, it now has to let the advantages of core banking improvements filter down to customer satisfaction. If it works, it will place plenty of pressure on the other banks to play catch-up. But the jury is still out on whether more customer-friendly banking will convert into customer additions.

According to the latest Roy Morgan research, CBA is now only 0.9 per cent behind the leader in customer satisfaction, having closed the gap.

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, according to Narev, takes account of its exposure to the recently collapsed construction arm of 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 fought back.

The counter-attack was especially tough, with unions accusing BHP of wanting to dilute safety in Queensland, saying this approach had caused the deaths of 29 miners at the New Zealand Pike River coalmine 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 federal Workplace Minister Bill Shorten took a tamer approach, saying the company's industrial relations problems stemmed from its ability to negotiate, the unions' response was nearly impossible to counter.

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