Commonwealth Bank - Report to Shareholders 2003 - Message from the Chairman

Message from the Chairman

The 2003 financial year was characterised by continuing global uncertainty, but this was offset for us by the continuing strong performance of the Australian economy. A buoyant housing sector, combined with modest business growth, helped to produce very satisfactory results in the banking business. Global and domestic equity markets displayed a high degree of volatility and negative returns for most of the period, which made for quite difficult trading conditions in the insurance and funds management part of our business. During the year, the Bank also responded to its rural customers to help them manage their finances during one of the worst droughts in Australia's history.

These external conditions highlight the importance to the Bank of a strong franchise, backed by a diversified business portfolio and supported by strong systems of corporate governance, which I described at some length in last year’s report.

The Commonwealth Bank’s statutory net profit after tax for the year ended 30 June 2003 was $2,012 million, a decrease of 24% on the prior financial year. Net profit from ordinary activities (‘cash basis’) was $2,579 million, an increase of 3% on the prior financial year, after charging against the profit restructuring costs of $214 million and $45 million representing the cost for two years of grants of shares to employees under the employee share plan. The difference between statutory and cash profit comprises two non-cash items; the amortisation of goodwill and an adjustment to the appraisal value of the life and funds management businesses.

Growth in cash profit was driven by a strong performance from the banking business and an improved performance from the life insurance business, partly offset by a reduction in the funds management result for the year. Total operating expenses for comparable businesses remained relatively stable compared with the prior year. For more information on the Company’s financial performance, please refer to the Review of Operations.

A final dividend of 85 cents per share fully franked will be paid on 8 October, 2003 bringing the total dividend for the year to 154 cents per share. For the past eleven years, the Bank has increased each interim and final dividend above those paid in the preceding year. The Company’s ability to increase the dividend on each occasion confirms the maintenance of the underlying momentum of the operations of the business. Earlier this year I wrote to shareholders in the light of some misinformation circulating in the media about the Bank’s acquisition of Colonial Limited and the nature of the payment to a former executive. Although conditions in the wealth management industry have been difficult over the last couple of years because of the correction in share prices and the volatility in stock markets, your Board continues to believe that this acquisition was the correct strategy for the Bank to have adopted.

Because of demographic factors and the greater reliance of the community on superannuation and retirement savings, your Board believes that the wealth management business will grow at a faster rate than conventional banking business in the years ahead. It was this factor that contributed to the decision to grow this part of the Bank’s business more quickly by adding Colonial’s wealth management business to that which had already been developed by the Bank. The Commonwealth Bank has a distribution system within the financial services system second to none and on which we are confident we can build our business in wealth management in concert with the other financial services we provide.

Colonial was acquired by the Bank issuing shares to a value of $9.12 billion in 2000. The value ascribed to the wealth management businesses was $4.47 billion and the remaining $4.65 billion represented the rest of Colonial’s entities, the principal one being Colonial State Bank. Colonial’s banking businesses, comprising the bank and the banking service subsidiaries, were integrated successfully into the Commonwealth Bank’s banking business. The expected synergy benefits of $450 million per annum, which were mostly banking related, were fully realised and in a shorter time frame than projected, making this a very satisfactory transaction for the Commonwealth Bank and its shareholders.

The value of our wealth management businesses have also increased in value since we acquired Colonial Limited. At the date of acquisition these businesses were valued in the accounts at $6.736 billion, comprising $4.472 billion for the acquired businesses, $1.978 billion for our existing wealth management subsidiaries in Australia and $286 million for the ASB Sovereign business in New Zealand. The value of these businesses in the accounts at 30 June 2003 was $8.546 billion.

The increase in value of $1.810 billion comprises retained profits in the business, changes to Assessed Value through acquisitions and divestments and changes in net tangible assets since 30 June 2000 of $772 million and a net increase in Assessed Value taken to profit of $1.038 billion since that date.

The current accounting standards require the Bank, with the advice of competent actuaries, to make an assessment of the value of the wealth management business based on assumptions of future activity and to bring this into the profit statement at each half year. In the period from 30 June 2000 to 30 June 2002 there was an uplift in this valuation of $1.283 billion. In the first half of the financial year on which we are reporting there was a reduction in the valuation of $426 million and an increase of $181 million in the second half of the year making a net reduction in the year of $245 million. The net result is that this represents an increase of $1.038 billion since we trebled our investment in wealth management by the acquisition of Colonial.

The Assessed Value declined in the past year in a period when many portfolios have fallen in value, largely as a result of the correction that occurred in world stock markets, and when members of superannuation funds have experienced adverse outcomes in relation to their savings. It is not totally surprising that wealth management businesses would share a similar experience. But the Bank is in this business for the long term because of the demographic factors which are likely to cause wealth management businesses to grow strongly in the period ahead. We recognise that there are other factors that will continue to cause volatility in share markets and to see returns reflect this volatility. Overall, however, we expect the net result to be positive. Involvement in this part of the financial services industry is considered by your Board to be an area where we can confidently create value for you, our shareholder.


Although reasonably resilient, the Australian economy remains dependent on recovery in the United States. While there have been some positive signs, there are potential significant financial imbalances arising from the US current account and fiscal deficits.

The Australian financial services industry remains highly competitive, operating in an environment of reducing margins with the likelihood of slowing credit growth. Notwithstanding this, the longer-term outlook for the banking, insurance and wealth management sectors is for continuing growth.

Customers will need more convenient and informed access to financial services, through wealth management advice, products to respond to the aging of the population and personalised banking services for payments, savings and investments. The Board and management of the Bank have been focussing on how the Bank needs to respond in this environment. The Chief Executive Officer has outlined on the CEO's Report Page the strategy designed to address these needs.

Having acquired Colonial and added significant value, the Bank is extremely well positioned to meet the challenges ahead and to benefit from scale, breadth of services, and the strength of its proprietary distribution system. However, there needs to be a major transformational change to deliver the outstanding service levels, with enhanced staff engagement and simple and efficient processes required to be more competitive.

The Bank believes that it has relatively more to gain from such a change and will announce within the next six weeks details of the strategies, proposed investments, expected outcomes and implementation milestones of a program to achieve these goals.

Your Board is committed to achieving sustainable growth in all the Bank’s businesses and in growing sustainable and reliable returns for all shareholders, and to this end, the Bank intends to maintain its high dividend payout ratio relative to its peers.

I would like to take the opportunity to thank you for your continued support.

Signature: John Ralph AC, Chairman. 21 August 2002
John Ralph AC

20 August 2003