Via Morgan Stanley:
The pending retirement of CEO Narev in 2018 suggests more change is likely at CBA. At the same time, we believe the end of the mortgage bull market and increased political and regulatory scrutiny will weigh on CBA’s growth, returns and trading multiples.
Response to the AUSTRAC announcement: The Chairman has responded quickly to the AUSTRAC allegations. Today, she revealed that CEO Ian Narev will retire by the end of the 2018 financial year, with the timing of the announcement necessary to “deal with the speculation and questions abouthis tenure”. Last week, she announced that executives’ short term variable remuneration would be reduced to zero and thatnon-executive directors’ fees would be cut by 20% in 2017 given their “ultimate collective responsibility for the reputation of the Bank”. A Board sub-committee has also been established to oversee the response to AUSTRAC’s claim and the ongoing execution of CBA’s program of action.
Unusual CEO succession: The Chairman stated that there is an “ongoing comprehensive internal andexternal search process”at CBA. However, it’s unusual for the announcement of a major bank CEO’s departure not to be accompanied by the appointment of his/her successor. This hasn’t occurred since WBC’s AGM in 2006 when CEO David Morgan flagged thathe would not be renewinghis contract. In fact,even each of NAB’s “early” CEO departures (Frank Cicutto in 2004, John Stewart in 2008 and Cameon Clyne in 2014) was accompanied by the announcement of the new CEO. While there are a number of internal candidates for the CBA CEO role, we believe the nature and timing of today’s announcement increases the probability of an external successor.
Time for some change: CBA has been through a long period of stability and has been “followingpretty much the same simple strategy for adecade”. However, we believe the departure within 18 months of the Chairman (David Turner: December 2016), CFO (David Craig: June 2017) and CEO (Ian Narev: by June 2018) will accelerate change. In the past week, CBA has flagged potential non-core asset sales and CEO succession, which are two of the seven areas we have previously identified for review (refer Time For Some Change (9 Feb 2017)).
Potential implications of the AUSTRAC case: While any potential penalty relating to the AUSTRAC case is hard to predict, investors are debating six other possible implications from conduct concerns: 1) brand damage; 2) process and system remediation costs; 3) further management changes; 4) adjustments to sales and growth strategies; 5)greater oversight from APRA, and 6) higher probability of a Royal Commission, or other inquiries into conduct and pricing.
I would have thought that at the very least CBA will see its premium to other banks erased. A Royal Commission is now a certainty. I wonder as well if AUSTRAC won’t now get some traction with AML rules for realty.
Other than that, it is nice to see Fake Premier Bligh up to her ears in the muck.
