Ian Narev’s CBA legacy: big returns and big problems

The Australian 12:00am April 7, 2018

Richard Gluyas

From Monday, when he slides his feet under the chief executive’s desk at Commonwealth Bank, Matt Comyn will be peppered with the same question asked of his predecessor: what do you want your legacy to be?

Ian Narev, who left the building on Friday, used to answer: “I just don’t think that way.”

Perhaps it’s just as well.

While Narev’s six-year tenure has been marked by sector-leading financial returns, it will be remembered for an extraordinary sequence of missteps, misconduct and misdirected energy, often exacerbating the pain already suffered by CBA’s customers.

In a short video and note to staff this week, Narev had no option but to confront the unpleasant truth.

“Legacies are not about individual leaders; they’re about collective achievements,” he said.

“Regrettably, they are also at times about failure.

“Recently we have focused a great deal on the things that we have not done well, and which have hurt people.

“It is right to focus on those, collectively and personally.

“For my part, there are certainly many things that, on reflection, I would do differently and better.

“We should listen carefully, show genuine contrition, avoid defensiveness, learn and emerge stronger.”

Narev also listed the things of which he was most proud, including, somewhat paradoxically, the “values of the organisation”.

He remains proud of CBA’s improbable leadership in customer satisfaction, its imprint on the community, being ahead of the pack on technology, and its focus on financial wellbeing — the idea that the bank can be “successful for everybody”.

It was left to the chairman Catherine Livingstone way back on January 29, when she announced that Comyn would be the bank’s next CEO, to almost shamefully remind investors that CBA’s total shareholder return had been 120 per cent under Narev’s stewardship.

In the current febrile, anti-bank environment, it doesn’t pay to boast about profitability, particularly when Ken Hayne’s financial services royal commission was getting ready to rumble.

The truth, however, is that CBA, powered by its unassailable retail business, has left its rivals for dust — not only since Narev took the reins in December 2011, but also under his predecessor Ralph Norris.

As Comyn refines his to-do list on Monday, one of his great challenges will be to maintain the momentum of the retail bank that he previously ran.

Suffice to say, it won’t be an easy task. On Thursday, UBS analyst Jonathan Mott released a note predicting that housing credit growth could slump to zero next financial year if the financial services royal commission calls for a strict interpretation of the banks’ responsible lending obligations.

Mott said the commission was likely to recommend a higher level of scrutiny of a borrower’s living expenses instead of relying on the HEM (household expenditure measure) benchmark that assumes a modest level of household expenditure.

“While some mortgagors may not be impacted by these changes, others are likely to see a sharp reduction in borrowing capability,” he said.

Scenario analysis by UBS indicated that a 20 per cent fall in total housing finance commitments in the 2019 financial year could lead to housing credit growth slowing to zero.

This week, in characteristically blunt language, Paul Keating gave the last rites to the housing boom at a banking conference in ­Sydney.

“The salad days of bank lending are passing,” the former Prime Minister said.

The banks not only faced tighter controls as a result of the Basel accord to deepen capital buffers, but regulators had had a “gutful” of them.

Keating expressed surprise that the home lending portfolios of the banks had been “found wanting”, given the recent experience of the 2008 US subprime lending crisis.

The reality is that spectacular performance of CBA’s retail bank, which reported a record 3.01 per cent net interest margin in the December half-year, has obscured weaknesses in other parts of the group.

Already accounting for more than half of group profit, the continued prosperity of the retail business is critical.

However, the scope for CBA to reprice its back book of home loans in response to higher funding costs is limited in a hostile political environment.

As pressures emerge in the retail bank, Comyn will have to review capital allocation across the group, which will have implications for the institutional and business banking strategies, according to Morgan Stanley analyst Richard Wiles.

He says growth options must be identified, with a thorough examination of CBA’s offshore investments likely, and completion of proposed non-core asset sales, including a strategic review of its global asset management business, Colonial First State Global Asset Management.

As if that were not enough, Comyn also faces the equally pressing challenge of rebuilding the bank’s trust and reputation. CBA is currently embroiled in the Austrac money-laundering proceedings, an industry-wide royal commission, a rate-rigging action brought by ASIC, and an APRA-led review of its culture precipitated by the Austrac crisis.

The bank made a $375 million provision in its half-year result for a civil penalty in the Austrac case, and expensed a further $200m for known regulatory and compliance costs, including the royal commission.

CBA, of course, is not alone in facing many of these challenges, but the reason for its leading role in many of the industry’s ethical crises has been hard to pinpoint.

ANZ chairman David Gonski, who convinced Narev to succeed him as chairman of the Sydney Theatre Company, is loath to comment on a rival institution.

However, he describes Narev as a man of “great intellect and great feeling for his community”.

“Ian’s a top person and he’s doing a wonderful job as my successor at the STC,” Gonski says.

In a sense, Gonski’s commentary only deepens the mystery behind CBA’s chronic inability to de-escalate a crisis.

One senior banker says CBA is an illuminating case study of a chief executive getting everything right on the investor side of the equation but still leaving an institution under a cloud.

“I think Ian inherited an aggressive, hard-nosed culture overcompensating for CBA’s history of being state-owned,” he says.

“There’s been an awful lot on his plate and that culture has been incredibly hard to dislodge.”

While Narev was an intelligent and rational person, it was possible this blinded him to the emotional outrage expressed by victims of the bank’s transgressions, which seem to emerge in regular, two-year ­cycles.

It all began with Storm Financial in 2012, reappeared with poor financial planning advice (2014), popped up with rejected life insurance claims (2016), and exploded last year with Austrac.

Austrac was a classic example of rationality prevailing over raw emotion. Instead of dealing with the community outrage over alleged, albeit unknowing, money laundering, CBA sought to compress 53,000 reporting breaches into a single offence, arguing that the same coding error was at fault.

Legally, the bank is likely to be proved right, but the banker’s point is that the community outrage wasn’t effectively addressed.

A CBA insider says that Narev, for all his smarts, was either unable or unwilling to hold his executives accountable, preferring to “see the best in people”.

“Any failure to make people accountable for behavioural or performance issues is a big problem that can trickle down in large organisations,” he says.

“Also, Ian is not a career banker and didn’t have an intuitive feel for the business, or for risk.

“The internal view at CBA is that the Austrac case has been blown out of all proportion, but it will be some time before we understand how bad it really is.”

Narev said in his message to staff that the next six months are for family, not-for-profit and thinking time. “So hang out with the kids, take them to school, pick them up from school, spend more time down at the theatre company, and work in the education non-profits,” he said.

The CBA insider says Narev, despite occasionally indicating his exasperation with the political decision-making process, is actually quite interested in politics.

“Ian’s a fantastic communicator. Maybe he’s the next (ex-New Zealand Prime Minister) John Key,” he jokes. The odds seem impossibly large. But weirder things have happened.