The Distillery: CBA cash cow

Jotters applaud Ian Narev’s steady stewardship of Commonwealth Bank, with one saying it holds a salutary lesson in long-term strategy.

Commonwealth Bank of Australia boss Ian Narev announced a 10 per cent improvement in the bank’s cash earnings to $7.8 billion and almost every business commentator in the country is taking note. Narev’s stellar start as successor to Ralph Norris is characterised less by driving a new revolution and more by securing the fruits of the one already in motion.

The Australian Financial Review’s Matthew Stevens says the “defining characteristic” of Narev’s first year and a half in the job is his “minutely focused discretion”.

“Through his opening 18 months at the helm, Narev has actively resisted whatever temptation there was to manufacture short-term public differentiation from the past by chasing seismic change, preferring instead to bury himself in often invisible but enriching management tasks such as driving $220 million worth of productivity gains. His ability to consistently generate record-making commercial momentum from the machine, re-designed and then set in motion by predecessor Ralph Norris, reflects positively on a self-effacing effectiveness. And this continuing success might well be received as a timely, real-time lesson for others who have more recently inherited leadership.”

CSL’s Paul Perreault and BHP Billiton’s Andrew Mackenzie are two other examples Stevens cites. Fairfax’s Malcolm Maiden similarly looks at the comparisons between Commonwealth Bank and CSL.

“CBA boss Ian Narev said on Wednesday that he was still cautious about the outlook, but the 10 per cent higher $7.8 billion June-year cash profit he unveiled showed that he can work the franchise and add productivity gains to produce results that easily outstrip lacklustre system-wide credit growth. CSL has a network of supplier ‘customers’ in the United States that it services through 80 blood-collecting centres, and a global hospital and health industry customer franchise that consumes plasma and other high-tech pharmaceutical products derived from the blood that CSL collects. It created a powerful global presence by spending more than $2 billion to acquire two other blood plasma processors, ZLB of Switzerland in 2000 and Aventis Behring of Germany in 2004, and has never looked back.”

Now, back to Commonwealth Bank and Narev. The Australian’s John Durie notes, as many commentators have, that Commonwealth should in theory be trading below the market average because it’s a leveraged vehicle.

“That's where the market power bit comes in handy. Narev kept well clear of anything remotely political at yesterday's briefing, even walking away from an easy free kick to slam Reserve Bank governor Glenn Stevens, among others, for the sheer stupidity of contemplating a levy on deposits when there is zero need for any impost – the only reasoning being the rather lame excuse that other countries (with different rules) have one. Commonwealth Bank represents about 9.4 per cent of the Australian index, followed by BHP Billiton at 9.3 per cent, Westpac at 7.6 per cent, ANZ Bank at 6.4 per cent, National Australia Bank at 5.7 per cent and Telstra at 5 per cent, which just goes to show how easy it is to manage your own portfolio when 43 per cent of the index is accounted for by four banks, one resources giant and a telecommunications behemoth. That also explains why Narev can deflect concerns about his profitability by pointing out the average Australian household owns 930 CBA shares, which have risen in value over the past year by 37 per cent, or $14,954, and paid $3385 in dividends.”

The Australian’s Richard Gluyas similarly observes that Narev’s political nouse in regards to the bank’s mega-results.

“Narev shuns hyperbole. In particular, he hates the word record, as in a record profit. He reckons all it means is that you've hit a record once, and then continued to grow the business. That's one way of looking at it, and not a bad angle when expansive oligopoly profits are under constant political and regulatory review. But once he has defused an unwanted headline, Narev is happy to talk about growth, and his conviction that there's plenty more to come. It's all about leveraging the bank's record (that dreadful word again) levels of customer satisfaction to form deeper relationships and grow revenue.”

Now, on to the Commonwealth Bank results in detail. Business Spectator’s Stephen Bartholomeusz reports that the bank’s cost-to-income ratio fell by a full percentage point.

“Part of the explanation for that is the big investment in technology that began under David Murray and continued under Ralph Norris and now Ian Narev. The bank invested about $1.2 billion in the latest financial year and continues to spend heavily to improve its efficiency and effectiveness and to protect itself from the prospective threat of new technology-based competitors. That’s an enabler of what the group describes as its ‘productivity culture’, which was reflected in increases in customer service and sales and converted referrals transactions per employee as well as a truncation of the time to execute transactions and services.”

The Australian Financial Review’s Andrew Cornell similarly notes that Commonwealth is making its customers more satisfied with less staff.

“CBA again made much of its claimed technology leadership, but beyond the marketing the most impressive element is the productivity story.”

Fairfax’s Elizabeth Knight writes that Narev delivered a lesson on long-term strategy because CBA’s technology investments are not just about securing profits today, but protecting profits tomorrow.

“Commonwealth Bank is at the tail end of one of the biggest and most expensive IT overhauls in Australian corporate history. It has put the bank ahead of competitors and should provide some fortification against non-bank, technology-based start-ups that have started vying for a piece of the traditional banking market. For years CBA strategy has been questioned by some investors who considered completely reinventing the core banking systems as risky overcapitalisation. The fruits from this investment were on clear display on Wednesday.”

The Australian Financial Review’s Chanticleer columnist Tony Boyd says that if you dig deeper into the Commonwealth Bank numbers you’ll discover where the next profitable division for the bank is.

“Ironically, the information is buried in the worst-performing out of CBA’s seven business units: business and private banking. The division was the only one to deliver a decline in cash net profit after tax. The cash NPAT fell 2 per cent to $1.48 billion in the year to June. But behind that negative number were startling success stories that bring together two important aspects of the CBA strategy – customer service and technology."

The Herald Sun’s Terry McCrann gives readers a lesson on balancing interest rates for mortgage holders and depositors in a world where the former takes political priority.

Elsewhere, The Australian’s Asia Pacific editor Rowan Callick reports that the coverage of the Australian election by foreign media has been diminished by Australia’s lack of curiosity about the rest of the world and the constant chopping and changing of leaders has left the rest of the world exhausted.

And finally, The Australian’s economics editor David Uren asks, ‘Where in the world is Labor’s tax policy?’

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