Narev on bank tax, housing market and culture

  • By Andrew Starke
Ian Narev

Commonwealth Bank CEO Ian Narev has called for the government’s bank tax to be debated on “an honest footing” to determine whether it is a legitimate way to fix the Budget or a cynical political play. Speaking exclusively to AB+F, the CBA boss traversed a wide range of topics, speaking candidly on the challenges facing Australia’s largest bank. Andrew Starke reports.

AB+F: May has been a particularly interesting month in terms of economic and geopolitical developments. How would you rate the current economic climate given the last few weeks? 

Narev: If you look at the economy through a banking lens, we continue to see that things are okay. And I use that word almost technically, they’re not great and they’re not bad, they’re okay as a whole, and the trends are generally flat to moderately positive. If you were to line up all the key economic indicators, you would say that the economy as a whole is trending flat to moderately positive. Clearly household credit demand is a big topic. There are probably about ten individual topics we could use the whole lunch just to talk about and that’s one of them. 

The areas of weakness we’ve pointed out for a while, which have been consumer lending in the mining-associated areas of Western Australia, Queensland, which is still flat, still relatively weak and probably stable. The other two areas we talked about 12 months ago were global resources which is clearly better and New Zealand dairy which is better, so we think about that from a credit quality perspective. So I’d say the economy overall feels fragile because confidence is fragile but the underlying numbers are probably still a bit stronger than most of us feel.

AB+F: Given that overview, Ian is it reasonable to suggest that the next economic shock will come from offshore?

Narev: Despite geopolitical trends towards nationalism, it is a global economy and we are inextricably linked with the global economy. To that extent the fortunes of Australia are always going to fluctuate with the fortunes of the globe, with a bias towards China and South East Asia. I think the general environment feels fragile and probably - relative to the last ten years - more fragile than usual. Everybody still has the same range of views they’ve had on the Chinese economy for the last three or four years: no-one knows. 

Relative to most recent years, Europe probably feels moderately better and particularly I think of what happened in France politically. I think most people feel economically it’s on a slightly more solid footing than it has been and I certainly think from a banking perspective things feel moderately more solid than they have for a while. 

AB+F: We always touch on the housing market when discussing economic conditions with banks. What do you think that the government and the banking sector could do to best insulate both this sector and the economy generally from when the housing sector does flatten off?

Narev: I’m not actually sure we’re defining the problem very well and I think there are three issues, which are separate, but which clearly have some interlink. Number one is affordability, number two is credit stability and number three is the link between debt levels and consumption. Now there are some drivers that affect all three, but they’re very separate issues. Affordability is the question of how we collectively as a community and a society define the level of aspiration we want an up-and-coming family to have, what sort of property and what sort of area? And then what are the settings that are going to make that work? This is where a lot of both the demand-side and the supply-side policy questions come in. It’s an overall mosaic and too much of the debate has been around should we have Capital Gains Tax? What should negative gearing be? To answer affordability, you’ve got to look at the whole picture.

No matter what happens with property prices, if unemployment is stable and the interest burden is going up then you’re not going to have a significant credit problem in the near term. And that’s the trajectory we’re on at the moment but of course that could change. Finally, I don’t think people understand that the biggest driver behind the Reserve Bank’s attitude is as you see household debt just go up in aggregate, the level of consumption that people are substituting for interest payments goes up and therefore consumption goes down. And over the medium to long term that’s a dampener on the economy. This is actually the factor most worrying the Reserve Bank. So is housing over or undervalued? I think it sort of depends on which debate we are having of these three different issues.

AB+F: The Federal Government is strongly on a platform of reducing company tax to increase economic activity, investment and employment as part of the “jobs and growth” mantra. And then they’ve got to balance the budget. How do you see this working out?

Narev: Somebody showed me some commentary the other day saying “Oh, the banks were remarkably silent on corporate tax”. I was personally at a Canberra media conference with five other business leaders where we said unequivocally that we’re for the tax cut. So I’m not quite sure how much more visible we can be on our view on that. The bottom line is that we do have a belief that if the tax burden is relieved and that money is in the hands of the private sector effectively, which is what it would be, you will get a much greater boost to the economic agenda than if the money is in the government’s hands and I think there’s very good evidence to support it. 

So I think it’s a very good political debate about your propensity for tax levels versus expenditure and I think that’s a good, legitimate political debate. But where we stand on that from an economic perspective is the long term economic prospects of the country are best served by having that money in the hands of the businesses, who will create jobs, and having offset our productivity gains on the expenditure side of the government agenda to keep spending and balance. I’m not saying that’s the only way you can run a country, that’s a policy decision, but in our minds it’s a very clear economic equation that we are for the tax cut.

AB+F: What do you think are the key points that the community needs to understand about the bank levy? How do you think this discussion will be framed? 

Narev: The issue that I’ve got with the debate is every time we hear somebody from the government talk about the tax there’s a different reason they did it: “a) It’s fair that the banks should pay, we need budget repair and it’s fair that the banks should pay, b) you’ve got an implicit guarantee you should be pay for it, c) we’ve got competitive benefits, d) you’ve been bad and so you should pay for it”. Our view is it’s very clear there’s a budget gap, there was a discussion to be had about where’s the least political resistance going to be for public and it’s gouge the banks. I think that’s pretty straightforward. You can dress it up as you like, but that understanding is pretty straightforward in most people’s minds.

So message number one is let’s have the right debate and ask: “is it fine when you can’t make a budget balance to go back to the largest taxpayers and tax them more?” And if the political view on that is “yes, it’s fine” then that’s legitimate. But let’s first have the debate on fair grounds versus dressing it up with every excuse and just sort of testing which one works. The other key message for people is there is no such thing as an absorbed cost and I think business people need to understand this. If you’ve got an extra cost you do one of three things: you charge more for your product, you invest less to make the cost base work, or you cut your returns to shareholders.

Now I understand that “absorb” is generally used as a proxy for anything other than pass it on to customers; that’s fine, but costs don’t get absorbed and the bottom line for the banks, and the Commonwealth Bank in particular, is when you are cutting our returns to shareholders that is affecting most of Australia. So let’s just be very clear about the debate. Number one, is it okay if you can’t make a budget to balance just to go to the taxpayers and say pay more and, number two, can we at least have the debate on an honest footing where everyone understands “absorb” doesn’t exist except in political rhetoric; it’s only a question of where does the burden fall? And we’re up for that debate and if it results in there being a tax, well, at least we’ve had the debate on an honest footing, but that’s just not way the debate’s being had.

AB+F: This tax is coming from a Coalition government and Labor announced their support within 20 minutes. What can the industry do to build more political capital in the future?

There is no doubt that over the years, in many of our own deeds - not the majority but some - and our responses to them, if the industry had its time again it would do things differently.

Narev: There is no doubt that over the years, in many of our own deeds - not the majority but some - and our responses to them, if the industry had its time again it would do things differently. And everybody in the industry would acknowledge that and say we’ve learnt and we are now doing all the right work, but we’ve got to accept that has created a much higher degree of public cynicism about the banks, which helps when you’re running policies against the bank’s interest. So much of it we’ve got to take some accountability for. 

We absolutely have our own level of accountability for the negative climate towards banks but I think we’ve also got to accept that it’s been exploited pretty cynically.

Beyond that, I think the relationship generally with the government and with politicians has been reasonably constructive and so that’s why we were staggered that there would be that level of tax, which we found out about an hour before the budget was released. Now I understand the reasons why that’s difficult because they’re worried that it would leak and all these sorts of things. So I sort of get that, but there are ways around that. And if you’ve got a government which doesn’t have a constructive enough relationship with one of the critical sectors of the economy to consult, then that’s a problem in of itself and there’s no way that that can be a one-sided problem. I think we’ve got to take our share of responsibility for that, but so does the government. We absolutely have our own level of accountability for the negative climate towards banks but I think we’ve also got to accept that it’s been exploited pretty cynically.

AB+F: Are there parallels with what the mining industry did with the mining tax?

Narev: I think it’s really important to see the difference. Number one is that when the mining tax was raised there was a whole side of politics that was against it, it wasn’t basically a topic of bipartisan agreement, at least at a policy level and, number two, the mining companies weren’t dealing with end consumers. So you’re not dealing with households who believe that the cost of iron ore that they’re paying for every week is too high. 

That makes it difficult to have it defeated, but who are we if we’re not going to speak up against it? When a government goes against what it apparently stands for with no notice in such a big way, who are we if we say to ourselves, “Oh well, the battle’s lost, let’s move on?” We’re not going to run those sorts of institutions. Now, there may be certain aspects of it, where it’s worth fighting the detail and we’ll do that, but the fact that this seems short term a lost political cause doesn’t influence our thinking at all because there’s a longer term gain here.

AB+F: These are clearly issues of principle to the banking sector but there are also many banks and mutuals not affected by the tax. Is there a danger of creating an ‘us and them’ situation between the major banks and the rest especially when all are represented by the Australian Bankers’ Association? 

Narev: There are banks that aren’t affected and it would be naïve of us to expect that they would have the same view as we’ve got and we respect that. Now yes, technically for the ABA that creates a few challenges and that’ll all be worked through. This isn’t just about sock it to your competitor. But we as an industry are very pragmatic, we know that it’s difficult for us politically, we know that we’re easy pickings, we know that competitors will be pleased to have the opportunity and we don’t bleat about that, we understand it. What we do really strongly believe is that these should be important debates of principle and not just expediency.

These are very active discussions and one thing I can say absolutely clearly is we’re not just going to keep arguing with government for the sake of arguing. There’s a lot of really thoughtful strategic thinking being done about where do we actually believe generally as an industry we could end up. Because the danger here is you just get into battle mode and keep arguing everything and you wake up one day and you’ve got all sorts of unintended consequences. Because we are really at the point where we are going to start harming the banking system and at that point, as far as I’m concerned, we’ve put all the political leaders on notice and we’re going to keep doing our best, but we’ve got to understand what some of the consequences are going to be.

AB+F: One policy document that all the banks agreed was the Sedgwick Review into bank employee reward and remuneration. What did you make of the recommendations?

Narev: This was the review done under the auspice of the ABA by Stephen Sedgwick in looking at the link between remuneration and customer outcomes and it was a really exceptionally good piece of work. So why was it important? Because in a competitive market having an industry agreeing on what is effectively a code of conduct, so there are no hidden incentives for people to do the wrong thing, is a positive way of looking at it and we needed his objectivity.

The recommendations are challenging and transformational, but within a day we’d all said, “Yeah, we’re going to do it. Ultimately, we think it makes the bank better, so we’re willing to do it”. One key thing to understand is that we’re so far beyond ever believing in predictable government policy that the only reason we will do things is if we think they’re in the long term interests of the bank. And the Sedgwick recommendations were absolutely in the long term interests of the bank and we think they make the bank better and we’re very committed to them.

AB+F: We’re going through a major and very significant time globally in how banking and financial services are being offered and the customer’s experience of these services. What do you think the next big steps are?

Narev: Customers are now increasingly benchmarking their experience with a bank against their best experience anywhere. If you’re taking your phone and you’re going to the CommBank app and you’re turning it on, once you finish you then swipe to Amazon to do something else, but in your own mind your comparing the experience of your bank with your experience of Amazon, not the CBA branch with the ANZ branch. 

So we’ve got to understand that and that creates a need for clean simplicity of experience in the interface, richer personalised information, mobility and faster cycle times; these are a lot of the themes that we’re working on. So that’s at the customer lens. At the competitor lens, what we’ve got to understand in addition to having new competitors providing those experiences is cost structures are being radically overhauled and even if we believe, as we do, we can compete with the quality of a customer interface, the question is if they’ve got a much lower cost structure they’re just going to drop the price and are we equipped to do that?  So there’s a huge amount of work to get through, but I feel we know what needs to get done. We’ve got a very good source of competitive advantage to deploy and therefore the question is can we execute with enough intensity? The short answer is we have to.