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Commonwealth Bank of Australia chief executive officer Ian Narev defended the lender’s profitability and decision not to pass on official interest rate cuts in full in an appearance before parliament yesterday.
While he conceded that the bank’s return-on-equity was higher than many peers in other developed markets, Narev also stressed that those economies had seen lenders either fail, nearly fail or at the very least struggle severely.
“You can’t have a prosperous economy unless banks are strong,” Narev told the House of Representatives Standing Committee on Economics in Canberra. “Our profits are at a level that will enable us to keep the confidence of global funders, who play a critical role in our ability to consistently extend credit.”
The CEOs of Australia’s four biggest lenders are this week being grilled by a federal parliamentary committee for the first time, facing questions about giving poor financial advice, executive pay and the fees they charge customers. Profits are also a key focus, along with the interest rates they charge mortgage customers.
Return-on-Equity
Commonwealth Bank posted a record cash profit of $9.45 billion in the year to June 30. However, return-on-equity has fallen to 16.5% this year from 22.1% in 2007, before the global financial crisis, Narev told the committee.
The big four Australian banks posted an average return-on-equity, a measure of how efficiently they invest shareholder funds, of 15.2% in the 2015 fiscal year, according to data compiled by Bloomberg. That was behind only the 15.6% mean of the five biggest Canadian lenders among developed world peers with a market valuation of at least $30 billion.
Prime Minister Malcolm Turnbull, who had his parliamentary majority slashed at elections in July, called for the hearings in an attempt to stave off demands by the main opposition Labor party for a more powerful and wide-ranging independent inquiry, known as a Royal Commission, into the finance industry.
Misleading Advice
Among the top items to be scrutinized is misleading financial advice given to clients, particularly by a unit of Commonwealth Bank. The lender has paid more than $62 million in compensation to customers since 2010, including $7.7 million through a system set up in July 2014 after a Senate inquiry concluded there was systemic misconduct in its financial advice division.
Narev, who was the first bank CEO to face the committee, on Tuesday, repeated an apology to customers affected, but said there will undoubtedly be more cases. “We will ensure that we put our mistakes right and learn from them,” he said.
In its latest move to crack down on banks, the government said Tuesday that manipulation of any financial benchmark will be made a specific criminal and civil offence. The announcement follows civil legal action brought by the securities regulator against Australia & New Zealand Banking Group Ltd., National Australia Bank Ltd. and Westpac Banking Corp., who are being sued over alleged manipulation of the nation’s benchmark swap rate.
ASIC Probe
About “15 or so, perhaps more” Commonwealth Bank employees have been interviewed by the Australian Securities & Investments Commission during its probe of the bank bill swap rate, the lender’s chief risk officer David Cohen told the committee.
ANZ’s Shayne Elliott will appear before the committee today, while NAB’s Andrew Thorburn and Westpac’s Brian Hartzer front the parliamentarians on Thursday.
The banks have also come under fire from both sides of politics for failing to pass on to home borrowers all of the Reserve Bank of Australia’s quarter-point cut in official interest rates in August. The central bank on Tuesday left rates unchanged at a record low 1.5%.
Narev defended the banks’ decision, saying there are other factors affecting funding costs.
“The Reserve Bank cash rate is an important benchmark, but a large number of the banks’ funding costs exist irrespective of that benchmark,” he said.
