The CEO responds to the editor of the Business Review Weekly

29 July 2004

Dear Sir

I would like to correct a number of factual errors and refute suggestions made in the BRW cover story of 22 July 2004, titled ‘The Which Bank Trials’, as they are misleading to the Commonwealth Bank’s staff, customers and shareholders.

In our May update to the market on the progress of Which new Bank, the Commonwealth Bank’s transformation program aimed at creating excellence in customer service, we confirmed that, for the 2003-2004 year, all major project milestones would be completed as planned and benefits for the period were likely to exceed targets. To call this news disappointing ignores both the information provided and the general response to the update by analysts, market and financial media.

More importantly, we indicated that we identified our staff’s willingness to change and their support of the ongoing transformation as a major driver behind the good progress of Which new Bank to-date. We also presented evidence of a strengthening relationship between the Bank and its customers.

The author of the article, Mr James Kirby, claims that Commonwealth Bank staff are demoralised, that customers are not seeing evidence of our progress and that the market overall is sceptical about Which new Bank’s progress. These claims appear to be based on a view unique to Mr Kirby and are moreover, contradicted by published evidence.

Which new Bank progress

In May, we informed the market that we were moving from a design stage to the implementation of Which new Bank’s most important activities and that all work stream activities for June 2004 would be completed on schedule.

As a result, we said that we expected to deliver the 2003/2004 spend within planned investment and that 2004 benefits were likely to reach $200 million, in excess of initial targets.

Staff morale

We have collected regular feedback from our staff on how they feel about Which new Bank and its various initiatives. An overwhelming majority of staff understand why the Commonwealth Bank needs to transform; feel well informed and positive about the change and believe it will help them serve customers better. Specific data was provided to the market about these matters in May.

Customer response

Customers are also responding positively, with customer satisfaction measures confirming Which new Bank has already started to make a difference. Strength of relationship indicators have risen in the first quarter of the year, after being stable throughout 2003. Changes to home lending and the resulting progress in processing, turnaround time and service levels, for example, have yielded clear improvements for customers. Again, data was provided to substantiate this in May.

Market reaction

As to the analysts’ and market reaction to Which new Bank, it is worthwhile noting the strong performance of the Commonwealth Bank share price in the first quarter of 2004 and the fact that the share price rose six percent in the two weeks following the Which new Bank update in May.

In fact, Mr Kirby’s observations that our share price has underperformed the S&P/ASX 200 index by 23% in the last year and that we are the second-worst performer of the major banks in stock price terms are both incorrect. For the 12 months to 30 June 2004, the Bank’s share price increased by 9%, which exceeds the share price change in each of the other three major banks. The share price grew 1% more than the S&P Financials (ex-Property) and was 7% lower than that of the S&P/ASX 200, not 23%.

Given the high payout ratio of the Commonwealth Bank versus its peers, an appropriate measure of performance is Total Shareholder Return (TSR), which includes the effect of dividends. Commonwealth Bank’s TSR for the same period was 19%, the highest of the four major banks.

We are not surprised by the cautious views of some in the investment community about revenue benefits. A mixture of views can be expected at this early stage in a three year program.

I reject Mr Kirby’s interpretation of the information provided and available to him and consider his approach potentially detrimental to the interests of our staff, customers and shareholders.

Yours faithfully

David Murray, Chief Executive