Don’t regulate bank profits, says CBA’s Ian Narev

Commonwealth Bank chief Ian Narev has warned it would be “dangerous” to regulate the industry’s profitability.

CBA chief Ian Narev at yesterday’s hearing. Picture Kym Smith

Commonwealth Bank chief Ian Narev has warned it would be “dangerous” to regulate the industry’s profitability, denying that shareholders hadn’t worn the cost of new regulation alongside customers and warning that lower returns boded poorly for the broader economy.

In a fiery exchange with Greens MP Adam Bandt at the beginning of this week’s closely watched parliamentary hearings featuring the big bank CEOs, Mr Narev said CBA shareholders had suffered a fall in return on equity from 22.1 per cent in 2007 to 16.5 per cent, and might decline further despite a relatively strong economy.

“It’s very dangerous for anyone to take a view that when things are going reasonably well, people should then start to regulate profitability, because I don’t want to be sitting here in a number of years’ time when cycles inevitably turn, wondering why banks are struggling because of regulation that was put in place when things were better,” he said.

Mr Narev — the first big four bank CEO to front this week’s closely watched parliamentary hearings — was also probed on the banks’ strong margins on small business lending and credit cards, his personal $12.3 million pay packet and wrongdoing in the CBA’s CommInsure and financial planning scandals.

While revealing no staff had been sacked in relation to several instances of poor practice at CommInsure, Mr Narev rejected the negative “characterisation” of the life insurance business, arguing the “vast majority” of claims were handled appropriately.

He also flagged support for a banking “tribunal” for aggrieved customers, improving bank account portability and “rate tracker mortgages” — products offered in other countries that are priced by a set margin above the cash rate and follow official changes.

Ahead of ANZ chief Shayne Elliott’s appearance today and before National Australia Bank’s Andrew Thorburn and Westpac’s Brian Hartzer tomorrow, Mr Narev conceded that banks didn’t always get pricing decisions right in the quest to satisfy customers and shareholders.

“I don’t think there’s any product under which I could sit here in good conscience and tell you we’ve made the absolutely perfect balancing decision,” he told Liberal MP Scott Buchholz, who claimed the banks were “gouging” with interest rates above 20 per cent on credit card cash advances.

“There are some products which could probably be a little more cheap … some which could be a bit more expensive. The combination of the shareholders’ needs, the customer needs, the competitive market, etc — these are all constant themes in the decisions we are making.”

Malcolm Turnbull ordered the bank CEOs appear annually before the House of Representatives standing committee on economics to quell Labor’s push for a royal ­commission, which has support from the Greens and other crossbenchers.

The Prime Minister also claimed the banks must be held accountable after they held back half the Reserve Bank’s August rate cut from homeowners to boost returns being depressed by tightening regulation, lower credit growth and falling interest rates.

Last month, new RBA governor Philip Lowe told the committee that bank profits and return on equity had fared well since the global financial crisis by passing on the hit to borrowers from having to hold more low-returning liquid assets and capital.

“My assessment is that the borrowers have largely borne the cost of that, not the shareholders of the banks, and it is an interesting question about who ultimately should bear the cost,” he said.

Mr Narev said banks globally had repeatedly warned the cost of stricter regulation would be borne by all stakeholders and CBA’s results proved “some of it also has been borne by Commonwealth Bank shareholders and shareholders of banks across the system”. He added that while the banks’ return on equity of around 15 per cent was higher than many banks in other developed markets, Australia hadn’t suffered a recession and bank failures in recent times, and strong profitability gave offshore funding providers confidence.

CBA’s return on equity was also outside the top third of returns of S&P/ASX 100 listed companies.

“Which banking system in the developed world would you prefer?” he asked, when quizzed on returns, which are similar to those in Canada.

But he failed to reveal the returns of product lines such as mortgages, which analysts estimate to be up to 64 per cent on riskier loans to property investors. Mr Narev also failed to commit to following Westpac’s move to remove all product-related incentives for the bank’s front line branch tellers, saying the industry was reviewing commissions and any conflicts of interests or pay that promoted bad behaviour would be revised.

Probed on the record high “spread” on small business lending interest rates relative to the cash rate, Mr Narev said banks priced for default risks “through the cycle” and to protect depositors.

“I understand that when conditions are a bit better that looks like defaults are down and therefore the rates should go down,” he said.