Ian Narev, CEO, Commonwealth Bank
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Good afternoon, ladies and gentlemen.
I would like to start by acknowledging the traditional custodians of the land we meet on today and pay my respects to their elders, past and present, all other Indigenous Australians with us here today. And actually doing that here not only because of our belief that it shows the right respect of the standing of Aboriginal culture in what we do everyday but equally when we’re talking on the topic of leading for the long term, and we understand the importance of custodianship, stewardship, story telling history in the Aboriginal culture. I think at this point in time there are even more lessons that we can learn from the country’s collective Aboriginal heritage.
And it really is that theme of leading for the long term that I want to concentrate on today because I want to paint a little bit of the environment where even more than we’ve seen in recent times, good decision making is going to be based on a fundamental view of long term value creation rolled back versus a view of short term share prices rolled forward, or short term opinion polls rolled forward. So as leaders, when we’re thinking about leading for the long term, the first thing we absolutely need to keep in the back of our minds is a responsibility of making the decisions that are going to be the decisions, the right decisions for the long term.
And in that – on that note, John, I would like to thank you for persevering in the long term in the knocking of the door. It is a real delight to be here speaking in Perth today and I know the AICC to be a very long term focused organisation. A very persistent organisation. And I’m delighted that you didn’t give up on the invitation.
I don’t have a big prescription today on what leading for the long term might actually mean but I do want to focus on three themes that are particularly important to us at the Commonwealth Bank as we are thinking about our responsibility of the long term. And those three themes are volatility, innovation and trust. Volatility, innovation and trust. So as we’re trying to make sense of all of the things that are going on around us, those are the three long term themes we are really keeping at the forefront of our minds and they are based on external forces, sort of the global macro-economy, the increasing boundaries of competition, changing what that does to customer preference and then what we might broadly call our licence to operate, our relationship with the community.
And it’s critical that as we’re thinking about decisions, even if their immediate impact in the short term, we’ve got those long term goals in mind. And in doing so, what we’re always trying to do with our senior executives is make them understand this concept of stewardship and custodianship.
The Commonwealth Bank started in 1911 but in fact, the agricultural bank of West Australia, which was a critical part of our heritage, started in 1895. And whenever we’re talking to our senior executives about the terrible difficulties of the current environment, which they all talk about, I remind people that Sir Denison Miller, who was the first governor of the Commonwealth Bank, effectively the first CEO in 1911, not only led the Commonwealth Bank at the time that he was sending his staff off to war, but actually lost his own son during that war.
So as we’re interested in talking about how unprecedented the times of turmoil and challenge for us are, as executives, in any corporation, we can well take heed of the fact that history tells us this is just our version of the challenges that have happened in different ways for every leadership and executive team over time. That said, we need to acknowledge that relative to ten years ago, times have really changed.
And the first thing we really want to focus on here in terms of leading for the long term is this theme of volatility. And the interconnectedness of the global economy and what that actually means for how we need to run the institution. And the critical theme for us is that we need to accept economic volatility now as an endemic state of running the business. The question must no longer be when will we get back to equilibrium, when will we get back to a state of certainty, but rather how will we continue to manage through a state of endemic volatility.
And I was having a discussion with a very interesting customer this morning who was here, but who will remain nameless, who said a very interesting thing to me about one of his agri-businesses. He said to me the price that we are going to be getting for what I’m growing is going to be dictated by Russian foreign policy. And I thought in that sentence, we encapsulate a lot of the challenge that is just endemic volatility. There is no such thing as an hermetic economy. There is no such thing as an economy that’s sealed off from global events and if we just reel off the global events, we can get exhausted. I mean three or four years ago, all the debate was around the unprecedented expansion of central bank balance sheets and how that will unwind and what the global macro economic effects of that will be. We now add to that the ongoing debate about the role of China. We now add to that ongoing geopolitical uncertainty, et cetera, et cetera. And although we may be in Sydney, or in Perth or in Adelaide, or in Broome, we are in that economy. And a lot of the decisions we make are going to be affected by the decisions of others a long way away from us that might have immediate effects.
So what does that mean in terms of how we need to lead the Commonwealth Bank? Well there are two key points for us – number one is we must have our business settings at a point where we’re able to withstand [indistinct] because we are the intermediaries of the economy where for the foreseeable future, the demand for capital will well exceed domestic savings. And that means that we are going to be the intermediaries of the capital into Australia and over the next 12 months we will borrow $100 billion from offshore. Just the Commonwealth Bank. We cannot take for granted the confidence of global funders, day in, day out, to provide that capital. And so as we are participating in a volatile economy, we’ve got to make sure that we are prepared for downturns at the same time as having the confidence to extend credit to the economy.
Since 2007, just to give you an example of how this works in practice, our assets have grown 121 per cent. Our capital has grown 378 per cent. So capital growth has outstripped asset growth by about 3X. Part of that obviously in response to changes in global regulation but a sign that leaders in financial institutions need to make sure there is strength there to withstand downturns and make sure that nobody takes for granted confidence in the economy and the confidence of global funders to provide us all with the capital that we require. So that’s part (a) of managing volatility.
Part (b) of managing volatility is trying to ensure that even as economies go in cycles, banks should do their best to smooth the cycles for their customers. Now we, at the Commonwealth Bank, as a banking system, are not always the best at doing that. Let’s be 100 per cent clear about it. But I’ve found it interesting, we were down here for our AGM at the end of last year and I’ve been back speaking to some of our people and our clients over the last day or so, we’ll do a bit more about that this afternoon.
And one of the most common questions I get is how are you feeling about Western Australian economy, what is that doing to your resource allocation decisions? And I say to people we’ve got 5000 people that we employ in Western Australia. We’ve got 207 branches or business banking centres, we have no plans to change any of that in response to shortened economic cycles.
Ideally as a bank, you’re doing a good enough job at the time that you originate the credit to make sure you can stand by the client during the more difficult times. Again we don’t do it perfectly but that’s the business model. So what I can tell you is that as the Western Australia economy and you all know this better than I do, went through its better times, we didn’t sit there saying let’s triple down on Western Australia economy. We just kept it at a state where we felt we were able to do our long term job in extending credit and safeguarding savers in the economy. And likewise as the economy turns down, we have no major strategic shifts contemplated.
We need to make sure we understand some people are doing it tough, we need to make sure we understand individual client and business situations, but part of managing volatility for the long term is ensuring that those basic strategic settings don’t change and they will not change.
So accepting that volatility is endemic but making sure that you’re making long term allocation decisions is the critical part of theme one: volatility. Theme two: innovation. And even though as we think about the changes of the world and we tend to think much more in the short term about the economic volatility or about the regulation or about the politics, a fundamental belief that we have in the organisation is that when whoever is leading the organisation looks back in 20 years’ time at this time, it will be defined above all by the profound changes going on in our competitive environment. The impact that that is having on customer preferences and customer tastes.
The reality is that as we stand today, we have exceptionally well managed major bank competitors with good franchises. Hopefully you choose to do business with us, not with them, but they are very formidable competitors. As we look into the future, that competitive set every day is changing. New business models are changing. We must be prepared to adapt with those business models. Now, part of that is our roots to market with our customers. We’ve now got over 5.5 million people using our CommBank app. For 75 per cent of them, it is the only way they interact with us digitally through mobile devices, and the numbers continue to change dramatically.
So part one of innovation is just making sure that we are keeping pace with the best of what’s going on outside banking. Part two of innovation, though, is having a fundamental mindset that we are going to need to think very disruptively about our own business. Now, let me give you a very practical example of this. If you go to South Africa and you walk into a Pick ‘n Pay store – those of you from South African connections will know it’s the third largest retailer – you will walk into 700 of those stores and you will see a kiosk that stands about this high. That kiosk is capable of taking a customer with no bank account, verifying him or her through optical recognition of the identity card, corroborated by biometric recognition of the fingerprint, fully complaint with the know your customer requirements, verify the customer, open the account, put a piece of plastic in their hand ready to use in 10 minutes for four Australian dollars. No branch, nothing else; that kiosk does it. That is fundamental disruption.
Now, the good news for us is that’s our innovation. So two years ago we bought a company in Johannesburg, Take Your Money Everywhere, which was at the early stages of developing this technology. We doubled down on it. We partnered with a black empowerment investor who has 10 per cent of the company. We have partnered with Pick ‘n Pay. We’re the exclusive financial services partner of Pick ‘n Pay; we have the kiosks in the Pick ‘n Pay stores; we have exclusive access to the information associated with Pick ‘n Pay’s 9 million regular shoppers and 20 million shoppers overall, and as of last Friday we have a full South African banking licence. Now, there are aspects of that solution, because of its link with the national identity system, that won’t work in Australia – though they will work in Indonesia, where we have had a business for 20 years and we are now rolling out the innovation.
But in addition to the opportunities we have offshore, we are thinking about what we can learn from our own innovation that we can bring back to disrupt here. And it is no coincidence that the new managing director of Bankwest, Rowan Munchenberg, is here today, who has been with the Commonwealth Bank for 16 years. His last job was the head of this business in South Africa, and that gives you a sense of how we are thinking about innovation, how we are thinking about disruption and, in addition, what an exciting future we are going to continue to roll out through a thriving independent Bankwest brand. So the second theme, innovation, is about adapting to how our customers want to deal with us, but at the same time working on fundamental disruption so we have the option of doing it to ourselves before others do it to us.
Then we get to the third point, which is trust. And this is a particularly common theme in banking since the global financial crisis of 2008, and an even more common theme in Australia over recent times. And I just want to talk about a couple of aspects of how we are and need to be thinking about trust. The first thing we as a banking system need to understand – and I speak here for Commonwealth Bank, and I’m sure you will hear similar things from heads of other banks – is that we need to understand that public expectations of financial institutions have changed and we need to change with them. So the first responsibility of a building of trust is with us, and in doing so we need to acknowledge we were too slow in hearing the signs of that from the community. The narrative that was being told within the banking system was Australia, through the global financial crisis, had a very strong banking system which kept it sound – correct – had probably the most stable and innovative banking system in the world – correct – and therefore the changing expectations which had hit customers in other parts of the world whose banking system has nearly collapsed would not apply to Australian banks – incorrect. And it took us too long to listen to that and to understand it, but now we have.
The mistake that we made is we failed to recognise that the experience that people have with the institution, or the reputation of the institution, will no longer be defined solely by the average experience, but it will be defined by the exceptional experience. In other words, when we were seeing and hearing stories of clients who weren’t having a good experience the immediate response was: but customer satisfaction overall is higher than it’s ever been – and it was and it is and that’s a great achievement, but that doesn’t matter to the individual who is having a bad experience. And so the banking system has had to realise and is realising that improving the experience for most of your customers is no longer enough. You need to be focussed on doing whatever you can for all of your customers. And you can see the signs of that now not only in what we’re doing at the Commonwealth Bank, but the Australian Bankers’ Association joint commitments on remuneration, on complaints, on whistleblower policies, on covenants and small business contracts, et cetera, et cetera. We are well progressed in that part of the plan. It’s something we at the Commonwealth Bank are committed to over years now. Fundamental change has happened, is happening, and will continue to happen, and it will continue to be a priority for the senior executives and the board.
So part A of trust is making sure that we hear that message and adapt our businesses, which is now what we’re doing. The second part of it, though, is being prepared to tell people who the banks actually are, and this brings me to the topic which I’m sure will be on peoples’ minds of recent times, which is the public debate about the bank tax. The essence of the point we need to make about the bank tax, in addition to the fact that we thought it was poor that a government won’t consult with such a critical industry, and that, when this big tax was put on, so many of the details which were so fundamental weren’t known. But beyond that, the essence of this debate lies in the terms: they can absorb it; they are very profitable. And the question we need to ask is, who is they? And the answer to the question of who is they is they is you. They is you, they is us. And let me just put up a single slide that can give you a little bit of a sense of what we actually mean by this, and this is a summary of they for the six months ended 31 December 2016.
You start with $13.1 billion of income. Now, that’s a lot of income, but bear in mind Commonwealth Bank is among the top dozen banks in the world by market capitalisation. In the six months represented here we did 140,000 new home loans, including new loans to 15,000 first home buyers; we did new loans to 12,700 small businesses, et cetera, et cetera. So it’s a big number because we are a very big institution, advancing a lot of capital to help people build homes and build businesses. What do we do with that income? The first part of it, $3.1 billion you can see there: salaries to 50,000 staff. Employing 50,000 people, maintaining employment levels, maintaining employment levels here in Western Australia. So this is the first they – our people. The next they is the rest of our expenses – $2.6 billion. Included in those expenses is money that we pay to 5000 small businesses in Australia who provide us with goods and services and hundreds of community groups that we support. So the second they is small business partners and community groups. The third bit’s a little bit esoteric, it’s the loan impairment expense. It’s effectively the cost of credit, the cost of losses during a period. You can see there it’s a pretty big number, but relative to a balance sheet of over $800 billion it’s not a big number. But the reality is part of a banking model is and always will be you are going to lose some money, and that’s in there.
The next they is the fact that even before the new tax, for this six month period to December 2016 we were the largest taxpayer – $1.9 billion. Now, if you actually take the total tax footprint of the Commonwealth Bank, the corporate tax we pay each year as Australia’s number one taxpayer, the GST we pay, the payroll tax we pay, and the pay-as-you-go that we deduct from the people on the left-hand side. The total amount of tax associated with us is larger than Western Australia’s share of the Federal Government’s health budget, so it’s over $5 billion. So the next they are all the beneficiaries of the tax that the Commonwealth Bank pays. The next they is the $1.5 billion of that lending- of that income that we reserve for the climate innovation that we’ve talked about, and that we’ve also reserved for growing the balance sheet. As I have said before, we need to grow capital at a faster level than we’re growing lending, so we need to reinvest that to ensure that we can continue to grow and support Australian households and businesses. That’s the next they. And then the last they are the people who are so appropriately referred to as my bosses. 800,000 Australian families own the Commonwealth Bank directly. Now, millions more own through their pension funds. Here in Western Australia 87,000 families directly own the Commonwealth Bank. Their investment to the Commonwealth Bank is currently worth just over $5 million. That’s direct investment, let alone how much they all own through their super.
So, they can absorb it needs to be either the staff, the SMEs or community groups, less lending, less tax, less reinvestment, or less to the shareholders. That is the sum total of they. And as you can see from this, that’s what underlines our view that they is you, they is us. And what’s critical about this debate - and that we need to do a better job of explaining - is the impact no matter where a new tax arises, no matter where it ends up, it must end up in one of these places. There is no other place for it to go. And this is a critical part of understanding what has happened, and also part of understanding what it is I heard from a couple of clients early on this morning is the question of if it’s going to happen to the banks while the banks are successful, who will it happen to next time they’re at a Budget gap. Well, they’ll walk to whoever the next successful industry is, because they can absorb it too.
So, we need to accept that in building trust that a big part of the response of leaders on us, making sure we lift our standards to the justifiable expectations of the community. At the same time, we need to be very clear that strong banks mean a strong Australia. And that we get to a certain point which we believe we’ve got to where even though people always understand that having a go at the banks is a fair game, at a certain point you hit the level where it is going to have an impact on all the bank stakeholders, where it is going to have an impact on confidence, where it’s going to have an impact on stability, and we have reached that point. So we are not pushing back so strongly simply because of the dollars; we are pushing back because of the principle and the impact of the economy.
To finish, as we think back to this idea of the longer term and I focus on the leading for the longer term part of it, no matter what walk of life you’re in – and I’ve had the privilege of meeting today former governors of the state and current chief justices and business leaders, medical researchers – we all know that the good decisions we are going to make are really defined by making the best decision on a spectrum of possible outcomes. And when we think about volatility and innovation and trust, ultimately as leaders have got to strike a balance between two critical aspects. Number one, we must be prepared to listen. We have not done that well enough and we must, as an industry, be prepared to listen better to our stakeholders. At the same time, we must never be seduced into believing that leading our organisations effectively is a popularity contest. We must not make decisions because they’re going to be easier in the short term. We must not make the decisions because they’re going to get certain stakeholders off our back, or because they’re going to give us a short term spike in the share price, or because they’re going to give us a pop in the short term opinion polls. We must resist that temptation, and while we’re listening carefully, also be prepared to make the right decisions, the ones that when we look back in five or 10 years when it really counts, we are then going to be able to define the institution by the quality of the decisions that were made then based on the impact that they’re having at that point in the future.