Paul Keating, David Murray, Ian Narev on CBA success story

A quarter-century after partial privatisation, the Commonwealth Bank success story has many fathers.

Commonwealth Bank CEO Ian Narev is still shaping his legacy. Picture: Renee Nowytarger

Paul Keating looks down the barrel of the camera and doesn’t hesitate.

“The fundamental decisions to create the current Commonwealth Bank — I took them,” the former treasurer and prime minister says.

“I did the investment banking. I did the State Bank of Victoria deal and the building of the Commonwealth Bank.” No need for humility, then, over the SBV rescue in 1990, the partial privatisation of CBA 25 years ago this week, or the creation of today’s $120 billion banking and wealth colossus?

“Well there’s nothing to be humble about,” he says.

“It’s the most valuable bank in the world and my label is glued all over it.”

It’s trademark Keating.

In a 2013 interview with then-ABC presenter Kerry O’Brien, the ex-PM’s conviction was absolute that, without him, CBA would not be what it is today.

In fact, so pivotal was his contribution that it completely overshadowed more marginal players like the bank’s four chief executives since privatisation: Don Sanders (1987-92), David Murray (1992-2005), Ralph Norris (2005-11) and the incumbent Ian Narev.

Murray chuckles when he hears Keating’s quotes, saying he’s going to have to give him a call.

He praises Keating, however, for his “significant insight” that the SBV deal could be wrapped into a partial CBA privatisation, which itself was a logical extension of the hard work done on fin­ancial deregulation in the 1980s.

“I was doing strategy at CBA at the time and it was clear that retail banking would change with economies of scale, and that the state banks were all vulnerable,” Murray says.

“It was also clear that the bank could not continue in public ownership — I studied the capital formation of CBA from 1911 and the Commonwealth never injected 1c of capital until 1987, when it put in $15 million, yet it wanted all the dividends it could get.

“So (Keating) was aware that we were thinking about SBV but it took his personal drive to put it ­together with privatisation.”

Success, of course, has many fathers, which is why there’s a lot of self-congratulation about CBA’s relentless climb into the top-10 global banks by market value.

A $2160 investment for the minimum allotment of 400 CBA shares in 1991 is now worth about $148,000, including reinvested dividends and franking credits.

But as chief executive Ian Narev notes, that’s all history, with past performance no guarantee of future success.

“Well-resourced and well-managed local competitors, and a still amorphous array of technology-driven business models from which some serious threats will emerge, all have their sights on our market positions,” Narev tells The Weekend Australian.

“The macro environment is characterised by low global growth and higher volatility, and we have higher degrees of scrutiny — some of it very well-founded and some of it politically opportunistic.

“So the risks are clear.”

If Keating was the original architect of the modern-day CBA, one of the great ironies is that he wasn’t there to cut the ribbon on July 17, 1991, when the stock listed on the ASX.

A month before, he had resigned as treasurer and returned to the backbench after failing to topple prime minister Bob Hawke in a leadership challenge.

John Kerin, who had none of Keating’s flair, was elevated to treasurer and attended the formal listing ceremony, commenting prosaically that “the Australian government, as owner of this bank, believes that it is very well-managed and the price offer is sensible”.

Even Sanders, CBA’s buttoned-down CEO, managed to top that.

“We don’t want to be a firecracker performer; a great display one day and a pungent smell the next,” he said.

As Murray attests, it was a miracle that the float went ahead in the first place.

Rusted-on Labor supporters saw privatisation of the “people’s bank” as a fundamental betrayal of party principles.

Many of them never forgave the government for its solemn assurances at the first two stages of the three-part privatisation process that the sell-off had finished.

The earlier takeover of SBV, mortally wounded by its tearaway investment bank Tricontinental, was equally controversial, particularly in its home state.

University of Melbourne fin­ance professor Kevin Davis, who was part of Murray’s financial system inquiry in 2014, wrote a paper in 1990 that concluded SBV could “continue to operate in its own right as a publicly owned bank”.

He said the CBA deal undervalued SBV by $2.7bn.

In any event, SBV disappeared into CBA, with Murray unleashing a massive efficiency drive when he became CEO to slash the group’s bloated cost-to-income ratio of 67 per cent.

The challenge he faced was compounded by majority state ownership, a workforce that was 80 per cent unionised, and a shortage of well-paid talent from the private sector because the bank was still exposed to the whims of the Remuneration Tribunal.

As Murray puts it, the bank had to be pulled out of the “cardigan era”.

It’s an apt phrase that had wide currency inside and outside the bank. In 1995, Murray raided Lend Lease to secure the future Suncorp boss John Mulcahy, who received the best wishes of his colleagues at a farewell. They also presented him with a cardigan.

The key to CBA’s cultural transformation, according to Murray, was a switched-on board led by Tim Besley, who had public and private sector experience and was chairman from 1988 to 1999.

“There was maybe 50 per cent of the workforce who believed the bank existed for commercial reasons, and the others thought we had a social charter,” he says.

“So the most important thing was to clarify we operated on a commercial basis, ensure there was a group of very good commercial people and that our objectives were very clear.

“The big surprise for me was the other banks let us out of jail — they didn’t think we’d come out of the blocks so quickly, but there was a significant managerial laziness in the industry at that time.”

By the time he handed over to Ralph Norris in 2005, Murray reckons CBA was a fully fledged commercial organisation, with the foundation established for a sorely needed improvement in service quality.

Norris, for his part, agrees that the bank had changed significantly, but says there was still a lot of work to do on customer service and staff culture.

“CBA had the worst customer satisfaction ratings, the lowest staff culture scores in the industry, dated technology and its market shares were under attack,” he says. “It was the second-largest bank by market cap and the fifth-largest company on the ASX.”

Norris’s refurbishment and transformation of the retail bank earned him widespread praise, with his counterpart at ANZ, the Asia-focused Mike Smith, ­effusive.

CBA’s customer satisfaction ratings were restored to No 1 and staff culture scores lifted to “world-class levels”, according to Norris.

The bank then undertook one of the world’s largest legacy-­system replacement programs, setting it up for a period of tech­nology leadership among its local and international peers.

Norris’s tenure, which ended with CBA as a top-10 global bank and the biggest ASX company by market value, was far from a ­leisurely walk in the park.

He confronted the worst of the financial crisis, but like Murray with SBV expanded the franchise with the $2.1bn purchase of Bankwest in 2008.

The handover to Narev in 2011 was seamless, although the second placegetter in the two-horse internal succession race, Ross McEwan, was poached to run Royal Bank of Scotland in Britain.

It’s Narev, however, who confronts a brace of challenges — many of them industry-wide but some CBA-specific — that will complicate his legacy.

The threat from nimble technology players is intensifying, the resources boom has subsided and reined in the performance of Australia’s miracle economy, an extremely benign bad debt cycle has turned, regulators are shockproofing the global economy through ever more demanding capital and liquidity requirements, and zero or negative interest rates are crushing profit margins.

CBA has also emerged as the industry villain after a series of scandals in its financial planning and insurance units, but it is the only bank yet to be targeted by the corporate watchdog over alleged manipulation of the benchmark bank bill swap rate.

Meanwhile, the Labor Party, which privatised CBA 25 years ago, is making almost daily calls for a bank royal commission.

Early next month, Narev will join his major-bank counterparts for a birching by the House Economics Committee, which is the Turnbull government’s lesser-of-two-evils response to Labor’s royal commission call.

It was announced early last month, only days after the banks moved to rebuild their margins by holding back about half of the 25-basis-point cut in the cash rate by the Reserve Bank.

Narev remains sanguine. “We have an exceptionally strong franchise, thanks to the work done by passionate staff under Ralph’s and David’s watch and for decades before them,” he says.

“We have a board and management team who understand that we are just temporary cus­todians of that franchise, and who are prepared to continue investing for the long term in our people and in technology to strengthen it. And we have a simple strategy that has worked for a decade and which still has significant ­potential.”