While the markets concentrate on the Commonwealth Bank’s dividend and loan deferrals, chief executive Matt Comyn has a secret agenda – he aims to do a “Don Argus” to the National Australia Bank.
And that agenda seeps into his various investor presentations, which show that CBA wants to replace the National Australia Bank as the pre-eminent business bank in Australia.
For countless decades Westpac was the leading Australian business bank but come the early 1990s Westpac was in chaos, as Kerry Packer and Al “Chainsaw” Dunlap tried to wrest control of the bank, which was at that time close to insolvency. Its close business banking rival ANZ was also in trouble.
NAB CEO Don Argus targeted Westpac’s and ANZ’s best small and medium sized business clients and his major thrust enabled NAB to become the pre-eminent business banker in Australia. And it still occupies that position.
The NAB’s current management position is nowhere near as chaotic as Westpac in the 1990s but it has a new CEO, Ross McEwan, and it took time to appoint a new business banking head.
At the same time, the bank is being dramatically restructured. That means it is hard to move quickly and decisively against the CBA thrust.
Accordingly Comyn has decided that it is the time to attack a weakened NAB.
As in the 1990s the main battle ground will be the small and medium business loans sector, so when the government said it would guarantee half the risk in certain categories of these loans the CBA pounced. It has taken an incredible 50 per cent of the Commonwealth partially-guaranteed loans.
The CBA is also helped by the fact that a third of its business loans are in New South Wales and that means the carnage that is taking place in Victoria from June 30 will be confined.
Indeed, we see in the Transurban figures, which came out at the same time as CBA, that NSW business toll traffic in the June quarter was down around six per cent, whereas Victoria was down 10 per cent.
Of course, the extra NSW toll roads would have helped, but even before the Victorian disaster NSW was performing better than Victoria.
New South Wales Premier Gladys Berejiklian has now provided two major stimulations to her economy, which are working. The first is to slash stamp duty on purchasing off-the-plan apartments. Given that there were only token sales off the plan, this measure cost almost no revenue, but it worked and it’s causing a rush of new buyers and a wave of optimism in the construction sector.
At the same time, NSW trading restrictions as part of COVID-19 are very liberal, which is boosting small business activity and is being reflected by toll road traffic post June 30.
The biggest threat to CBA and indeed the entire Australian stock market is that NSW will be hit by increased COVID-19 infections, forcing a reimposition of much stricter controls.
There are warnings in the medical industry that Berejiklian has gone too far but nobody knows. The Australian stock market needs to carefully watch the rate of New South Wales infections.
Meanwhile the CBA, along with other banks, is simplifying its product offerings and this is enabling a big fall in costs in the banking sector.
The Commonwealth Bank reduced costs by $548 million in 2019-2020 – almost three times the level of the previous financial year. My guess is that the cost reductions will continue as greater use of technology transforms the sector.
Back in 1990 then treasurer Paul Keating instructed the government-owned Commonwealth Bank to stick to its home lending, so it was not a player in the business market share war.
And with the takeover of the State Bank of Victoria the CBA established itself as the major home lender in the land and has held that position ever since. It has been highly profitable because the capital rules have been set to make home lending far more attractive that other lending sectors.
Although there are a large number of CBA home loan deferrals the overall housing market in NSW is either strong or stable and that means there will not be significant losses unless the virus gets out of control.
In Victoria, house prices are falling and may fall further. That will damage the equity position of the Victorian loan CBA deferrals, but they are confined to 25 per cent of CBA deferrals.
Interestingly some 89 per cent of the CBA business loans that have been deferred are secured and much of that security will be on the family home. Again a strong real estate market gives great comfort to bankers.
The good news for Australia is that using the toll road figures, traffic more than halved in the months leading up to April but then recovered 50 per cent of that lost ground by June 30. Since then Sydney and Brisbane have held the higher ground while Victoria of course slumped back.
This shows that the economy can recover at least part of the ground lost, although there are going to be a very large number of small business failures in final quarter of calendar 2020 and in 2021.
That will of course be a hurdle for CBA, but I don’t think it will stop Comyn from his aim to arrest business loan market share from Ross McEwan at the NAB.
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