CBA’s Ian Narev defends institutional banking performance

Commonwealth Bank chief Ian Narev says investors are getting “good returns” from the institutional banking division.

CBA

Commonwealth Bank chief Ian Narev has revealed he is personally combing through the group’s growing institutional banking ­division to ensure shareholders are getting adequate returns from clients.

Amid heightened concern about CBA’s expansion in the institutional banking market at a time when returns are low, Mr Narev yesterday assured investors the bank’s strategy was not about balance sheet growth and that ­returns were above the cost of capital.

Profits from the institutional division, run by Kelly Bayer Rosmarin, fell 9 per cent to $1.16 billion in the year to June 30, hit by weak lending margins, higher expenses and a 51 per cent spike in bad debt charges to $252 million.

“I have seen myself, as I’ve sat down with Kelly, a client-by-client look at profitability in the business — we’re absolutely satisfied (that) if we’re doing the right things we are going to keep earning good returns,” Mr Narev said.

He said they were “not the same returns we might earn in other parts of the businesses, but good returns for shareholders”.

While declining to disclose the division’s return on equity, Mr Narev said it would be above the bank’s cost of capital “on a number I think you would be comfortable with”.

His comments come after heavy criticism of CBA’s institutional growth in recent years, including a 19 per cent expansion in loans during the first half on the back of several privatisation and takeover deals.

UBS analyst Jonathan Mott recently said CBA was “strangely” expanding “at a time when every other major bank is shrinking” amid poor margins, including rival ANZ.

Citi’s Craig Williams has also indicated that institutional banking profitability was “now at critical levels” for all banks, predicting CBA’s ROE had more than halved since 2012 to 9 per cent at the end of the first half.

But Mr Narev said the institutional strategy was not about growth, but building “deep client relationships” that required the bank to use its balance sheet and then sell other services like transaction banking and hedging to create profits. He said expenses would slow as the business had reached the right scale to compete, pointing to the small 2 per cent growth in the second half.

“We’ve also got to bear in mind that with ... institutional clients, (telling them) ‘margins are a bit tough, sorry we won’t deal with you today’ and then if they get a bit better in two years saying, ‘Hi, we’re back’, is not a way to run the business,” he said.

In the second half, institutional lending slowed to 2 per cent and return on assets declined.

Morgan Stanley analyst Richard Wiles questioned the level of returns from a division making $1.1bn of profit from $180bn of ­assets.

“We wouldn’t be in the business if we felt that over the medium term to long term this wasn’t a good place to deploy shareholders capital,” Mr Narev responded.

“Everyone’s got their own views on what the long-run returns on that business will be.

“My own view would be, if you are only hoping to use your balance sheet you are going to have a business which erodes value.

“If you’re prepared to build deep client relationships you can have returns that are above the cost of capital.”