Chairman, thank you for the invitation to appear before you today.
We know that you have many important questions about the banking system, and about Commonwealth Bank specifically. And we also welcome the opportunity to provide our own perspectives. So we come here today with a spirit of openness and a willingness to listen carefully to suggestions about areas in which we can improve.
Two themes will underpin these opening comments, and we suspect much of which we will discuss today, and those themes are strength and fairness. These are among the most critical characteristics of an effective banking system. Because it’s through the combination of strength and fairness that we build and we sustain trust.
Over 105 years, CBA has seen the full spectrum of geopolitical and economic conditions in Australia and across the world.
Through these conditions, we’ve repeatedly seen the importance of being strong. Strong banks attract the capital and the funding that we need to manage savings, extend credit, help customers manage their risks, whatever the economic conditions. Simply put, you cannot have a prosperous economy unless banks are strong.
Through that time, we’ve also needed to balance the interests of many different stakeholders in a way that is fair, and that is seen to be fair.
Today those stakeholders include more than 10 million Australian retail customers; half a million business customers; 5,000 small businesses who supply us with goods and services; 42,000 Australian employees; hundreds of community groups; the Australian government, to which we are the largest corporate taxpayer; our regulators; and the 800,000 Australian households who own the CBA directly; and the millions more who own CBA through their super funds.
Nearly 80% of CBA is owned directly or indirectly by Australian families. Their collective investment in the bank is worth about $100 billion. In the 25 years since CBA listed, we’ve paid between 70% and 80% of our profits to those shareholders.
They are not Australia's elite. They are Australians from all walks of life.
Over the long term, the interests of all these stakeholders are aligned. Highly engaged employees who deliver good service lead to customers wanting to do more with us. That leads to profits that enable us to keep procuring goods and services from small businesses, keep honouring our commitment to keep all customer service jobs in Australia, pay taxes and, after all that, deliver good returns to Australian families, and other shareholders.
In the short term, however, the balance of interests may favour some stakeholders.
We’re sure your questions will cover a lot of ground. But at the outset I’d like to briefly address two issues that are on peoples' minds in the context of balancing interests: bank profitability, and the unequal power between customers and their banks.
The catalyst for our appearance today was our response to the Reserve Bank’s interest rate cut in August.
Whenever we make decisions about the prices of loans and deposits, they impact a lot of people. Those decisions can appear opaque, not helped by the fact that our explanation of them has been at times overly-technical and at other times simply insufficient.
When we set interest rates, we are constantly balancing the desire of 2 million Australian home borrowers and tens of thousands of business borrowers to pay less for their finances, the desire of 10 million deposit holders to have access to a higher interest rate, and the need to generate consistent returns for our shareholders.
We’re striving to be fair whilst staying strong. And we’re trying to do so in a market that is, as the Financial System Inquiry concluded, competitive, and in which some of the key elements of global regulation, that could have a major impact on our business, remain unclear.
As a result of our decisions in August, borrowers are paying less; depositors, 75% of whom are over 55, have had the opportunity to earn more for their deposits; and Australian families can continue to feel confident about their dividends. Understandably, each of these groups would have wanted more benefit. But our job is to achieve a balance.
We’re often asked, as we pursue this balance, whether our levels of profit are too high and no doubt we will explore this issue through your questions, both today and in our future appearances before this Committee.
It is correct that our returns on equity are higher than many banks in other developed markets. But in most of those markets, banks have failed, nearly failed, or struggled severely. Our profits are at a level that enable us to keep the confidence of global funders, who play a critical role in our ability to consistently extend credit. That’s not true of banks in most developed markets. The best example of a comparable developed market is Canada, where bank returns are in line with Australia’s.
And domestically, as our returns on equity have come down, CBA’s return on equity for the recent financial year was not in the top third of returns of ASX 100 listed companies.
Before we move off interest rates, I’d like to make one final point. Australia is fortunate in our view to have a Reserve Bank of the highest calibre. When we made our interest rate decisions in August, some critics suggested that we were neutralising monetary policy. We note that in front of this Committee two weeks ago, the new Governor made clear that our response was considered likely by the Reserve Bank, and did not fundamentally affect the transmission of monetary policy to the rest of the economy.
The second issue I’d like to discuss is the balance of power between customers and their banks and this issue lies at the heart of fairness.
We are pleased, I think justifiably, with the fact that independent measures show that our customers are on the whole the most satisfied they’ve been since Roy Morgan began its independent survey of customer satisfaction.
However the key to this is the words "on the whole". Because if anyone has a bad experience with CBA, I know that it doesn't matter to her or him how happy other customers are. And when we’re referring to money, a bad experience can have significant implications.
I have personally met with customers whom we have let down. I’ve done so in order to understand their experiences first-hand. I’ve said before how sorry I am for the pain we have caused them. I say so again today.
What we have learned, all over CBA, is this: even as we continue to achieve better and better outcomes overall, we must do more to make sure every single experience as good as it possibly can be.
Poor outcomes sometimes come from human error. No one company or individual is perfect. We will ensure that we put our mistakes right, and learn from them.
Other times, they come from inherently defective products or processes. In those instances, we must work quickly not only to put things right for affected customers, but also to identify the root causes of the problems, make the right changes to the way we do business, and, based on what we learn, look proactively for other possible problems.
We are very committed to doing that. And we’re well progressed. We are doing so through a combination of industry-wide initiatives, and specific programs within CBA.
Two years ago, we put in place a program of work that I lead, and on which I and my executive colleagues report to our Board at every Board meeting. We’ve looked at products, we’ve looked at policies, we’ve looked at processes going back in some cases more than a decade. We’ve proactively updated product terms, we’ve changed remuneration plans, we’ve invested in technology to do a better job at proactively identifying poor behaviour, we’ve remediated customers. And we’ve put in place a customer advocacy function that will minimise the chances that customers will feel disempowered when dealing with us.
In addition to all this, we’re active participants in an industry-wide program being coordinated with the ABA.
Our actions have significant independent oversight. In the case of our own initiatives, we consistently bring in external, independent expertise to thoroughly work through the problems, oversee how we compensate customers, and ensure permanent changes are made to stop the problems recurring.
In the case of ABA initiatives, an industry-wide program of work is being overseen by Ian McPhee, a former Commonwealth Auditor General. He’s reporting quarterly to the public on progress towards outcomes based on evidence of change.
And in addition to all that, we have very highly engaged and demanding regulators.
I’m confident that these changes are improving our customers' experience literally every day. We are making them with determination and urgency. They’re comprehensive, and they will take time to be fully completed in a business of our scale. But I can assure the Committee they’re a priority for me, my Board, my team and all of our people.
As we do this work I expect there will be cases of more poor customer outcomes. And there will undoubtedly be more announcements regarding compensation due to customers, which will include some significant monetary amounts given the scale of our business and the length of time we will go back to make things right. Critics will paint these as signs of on-going problems. Actually, they’re signs of how serious we are about fairness. They’re a sign of our realisation that we must do our best to make every experience, not just the vast majority of experiences, positive.
To conclude, when I talk with our people in branches, business banking centres and call centres across Australia, what I see and hear is this: the vast majority of our people come to work each day to do their best for customers. The culture that they collectively create is one that emphasises our values, and that strives to ensure that CBA is strong and fair.
But we also know we need to do better. We understand that fairness means ensuring that high levels of customer satisfaction are uniform levels of customer satisfaction.
We’re doing a huge amount to achieve that. And as we do, we expect and welcome scrutiny.
We expect to be challenged by APRA on whether we are truly strong.
We expect to answer difficult questions from ASIC, the Financial Ombudsman Service and others on whether we are fair.
This Committee provides another forum in which we can explain our decisions and our efforts to meet these objectives.
David and I look forward to answering your questions.