The bailout softening begins

Can someone, anyone, please explain to me why liability management is no longer a part of banking? That seems to be what CBA Chairman David Turner thinks. In his address to shareholders today he said:

Ladies and Gentlemen, I am very pleased that we have had another very good result. And this is notwithstanding the difficult environment in which we’ve been operating. This result is largely thanks to two things:

1. Our single-minded strategy of delivering even better customer service.
2. And the strong management of the group.

I will return to express our gratitude to Ralph Norris later. But Ralph would be the first to acknowledge that he has not done it alone. And it’s the efforts of his excellent senior executive team, supported by each of our 52,000 employees, that have enabled us to generate this good result.

We increased the dividend per share by 10%, and we paid a total of $3.20 per share for the full year. Dividend payments for the 2011 financial year totalled $5 billion, with over 80% going directly or indirectly to Australian residents. This is all in the context of a world in which there is continued uncertainty.

But against this backcloth, we have adopted a conservative stance and our strong financial position remains a priority. Throughout the global financial crisis, and beyond our cautious approach to capital, provisioning and funding meant that we were able to support our 11 million customers in the most challenging of times.

In fact that over the last year we have advanced almost $90 billion of new loans to our customers, and $200 billion over the last 2 years. This demonstrates our ongoing commitment to them and to the Australian economy generally. We pay considerable tax, and through our size, we support a wide range of Australian businesses. As you can see, we have a very strong Tier 1 capital ratio. This means that we are well placed to meet the impending Basel III capital requirements. And we are one of a handful of global banks to have retained a AA credit rating.

We remain well funded. The combination of strong deposit growth from our customers and subdued credit growth has seen us satisfy our lending from customer deposits which now comprise 61% of the Group’s funding. This strength has helped us to support the wider community. We’ve done so through a wide-range of charitable donations, sponsorships and other activities.

This year, in addition to our regular commitments, we’ve been able to provide help for communities in Queensland, Victoria and Christchurch who have had the appalling bad luck of being impacted by completely unforeseen natural disasters. More generally, while news over the past 2 weeks has been more positive,there are ongoing worries about the impact of both Government cut backs and sovereign debt in Europe.

Under these circumstances and given the sheer cost of refinancing banks, growth forecasts for that region are low. Even on an optimistic forecast, it seems most unlikely that there will be are turn to accelerating growth in the near future. The same might be said for the USA, but with a flexible labour force,productivity improvements and entrepreneurship at the heart of business,there must be greater hope of a positive outcome in the medium term.

All of this will of course challenge Australia, and we are not immune to vagaries elsewhere in the world. Wholesale funding markets will become more challenging and have the potential once again to place sustained upward pressure on Group funding costs.

You’d have travel a long way to find a more contradictory address than that. The bank is strong and well funded, as well as facing “sustained upward pressure on Group funding costs”. Not that that is the responsibility of the bank. It’s Europe, don’t you know. Just as it was the US in 2008.

Hope you’re listening mortgagor and tax payer.

2011 Chairman Address Incl Slides ASX

David Llewellyn-Smith


  1. The bank is strong and well funded, as well as facing “sustained upward pressure on Group funding costs”.

    Sounds like code for “we may not be able to pass on the full effect of future interest rate cuts” to me.

    • “Wholesale funding markets will become more challenging and have the potential once again to place sustained upward pressure on Group funding costs”. I’d say WF is already challenging, and if the RBA keep cutting the cash rate, and x Billion of the loan book is from WF then Alex I think you’re right. In the past Swan has failed to understand this point. They pay substantial tax … really! I’m not so sure. I can see like other banks worldwide they start to layoff staff before long, and Basel III makes it more difficult to make the super profits.

      • Let’s be a bit sensible with the cynicism. CBA is one of the top 5 taxpayers in this country as far as I know. The apparent contradictions pointed out by HnH are in fact real. Funding cost is going up for Aussie banks, even though they have reduced reliance on WF. A large part of the funding cost increase is indeed due to the turbulence in markets. While we at Macrobusiness would like to believe that it is because investors are nervous about Aussies bank’s exposure to housing, in my opinion that isnt a huge issue yet. Part of that has to with what I loosely term as institutional fixed income investors being ‘reactive’. They’re currently reacting to the events of Europe and being generally risk averse. This risk aversion has less to with the Aus housing market than we would like to think.

        Agree though, that B3 is going to make it harder for Banks to deliver above-normal ROEs. But it will make the system stronger and more robust. I whole-heartedly support APRA’s preponing the implementation of B3.

        My opinion is that a LOT has to happen before an Aus Big 4 bank goes down. It will truly be a dire set of circumstances that will bring that about. However, it is more likely they will have some reliance on the government’s AAA rating and the weaker banks (Macquarie, BoQ, etc) may potentially lobby the government to re-introduce the WF guarantee.

  2. How much of that nearly quarter of a TRILLION dollars in new loans in the last 2 years went to productive investments in businesses? Two thirds of you know what….SFA

    • Correct – very little went to business ventures and manufacturing Prince, and now the CBA has pulled out of invoice discounting completely.

      The reason that they have become building societies is to minimise risk, which although counter intuitive to most here, has actually paid off handsomely for them, courtesy of our strong mining export industries, who also no longer benefit from bank lending. We can only ponder what may have occured without a strong mining income.

      The banks got slaughtered in the nineties in commercial lending, and in earlier decades as well – who remembers the Alan Bonds, Christopher Skase, Ariadne, and a host of other high fliers who almost sent them to the wall.

      We have witnessed a change in banking that is ongoing, and it isn’t going back. A huge amount of small business lending is now done as a defacto home loan – so mentally adjust the business lending figures up and the housing loans down, but because it is all hidden no one has any true figures on that. Not even the banks.

      Then add on all of the lending done by non bank lenders, private lenders, factoring, invoice discounting, equipment finance, et all and the shadow banking system in this country is growing – but who knows how big it really is, I’ve never seen any credible stats.

      But I know it’s there and growing.

      • Well said Peter, thanks – I was a bit annoyed reading that flowery BS speech when I wrote my initial comment and you summed it up better. Cheers.

  3. All of this will of course challenge Australia, and we are not immune to vagaries elsewhere in the world. Wholesale funding markets will become more challenging and have the potential once again to place sustained upward pressure on Group funding costs. – CBA Chairman David Turner
    Compare and contrast that statement with what Sir Ralph said just over a month ago.
    Asked about the need for wholesale funding, he said there was no urgency to raise debt.

    “We can last several months. We would not need funding for the rest of the year,” Norris said.

    • I find myself contributing way more than I ever have today!

      Mav, I think you’ve misinterpreted the context. The statement made a year ago was reflective of the fact that at that time CBA had completed its funding task for the year. Currently CBA is back in the funding markets to find WF to fund the upcoming 12-18 months of business it expects to write. Once you take that into account, the two statements do make sense.

  4. Diogenes the CynicMEMBER

    Sir Ralph timed his exit well.

    CBA is one of those stocks where someone will make a lot of money shorting in the next 1-2 years. Just got to time it!

    • Agree. He is actually quoted as having said as much in a staff forum! The bankig industry globally is going to face a lot of headwinds. Regulation (mostly rightly so) is becoming tougher. Banks should go back to generating utility type returns.

  5. Why is liability management is no longer a part of banking? Simple. When you’ve got Government so willing to backstop your business, there is no such thing as a “liability” – they all belong to the Government now.

    • The BurbWatcherMEMBER


      I logged in to say pretty much that.

      What a systemically privileged position finance has!

      It is quite possibly the best example I can muster of what i like to call “Fundamental Crony Capitalism” at work…where the system has such privilege actually built into it deliberately.

      Sure, it is seen as “necessary”, but it is not – it is just preferred. And it results in wealth and power transfer over time, necessarily.

      It is certainly not real capitalism, and certainly not just…

      A note to you “Occupiers”: this is an example of why, if you are going to Occupy financial and corporate centers, you also have to Occupy govt centers – it is systemic, from those who design and regulate the system.

      And I need not even invoke conspiratorial notions, as I honestly don’t think they are the prevalent forces. Instead I would suggest that more innocent notions, such as ignorance of the scope of necessary outocomes of preferred system as applied to human nature, are the main influence….even driven by good intentions!

      Nonetheless, I would suggest that these sorts of outcomes occur because they were always going to, accordingly to how fallen people interact with such a system as that which we operate in, with its system design and regulatory framework.

  6. HnH,

    What about these guarantees they have from the govt? Does that not count as a good thing for them and the other banks?

  7. “This year, in addition to our regular commitments, we’ve been able to provide help for communities in Queensland, Victoria and Christchurch who have had the appalling bad luck of being impacted by completely unforeseen natural disasters.” Really? Not if you informed about the environment.

    It is the shadow banking surge that brought down the USA system. Yet we still have not changed the regulations to capture the relevant data so it may be measured and monitored.

  8. HnH, can you please wxplain why you made that statement “Why is liability management is no longer a part of banking?”? I’m not sure I understand. Working in a Big4 bank myself, there is a tremendous organisation wide focus atm at all the Banks on liability management. So I’m not sure I understand your point of view fully.