Why CBA chief Ian Narev had to go

The RBA’s unprecedented comments on money laundering made Narev’s role untenable, but this saga has further to go.

Commonwealth Bank CEO Ian Narev faces some anxious moments over the money laundering scandal. Picture: AFP

Forget the official statements. The unprecedented comments by ­Reserve Bank governor Philip Lowe and the chairman of the Australian Securities & Investments Commission, Greg Medcraft, made it essential that Commonwealth Bank announce plans to change its chief executive.

And those Lowe and Medcraft statements also greatly increased the risk to shareholders that any fine imposed by the courts would be greater that what the sharemarket believes — that Commonwealth Bank faces a maximum fine of up to about $500 million from the Austrac allegations.

Going one step further, that fine danger would be further ­increased if Ian Narev was still CEO when the court hearings took place.

A fine of up to $500m represents, in theory, a large amount, but given that CBA’s market capitalisation is about $139 billion and the profit is just short of $10bn, it’s a flea bite. On that basis, a potential Korean war or home-price fall is a far more serious issue for the CBA share price.

Given the looming Narev ­departure it’s important to go back to the Lowe and Medcraft statements and relate them to the danger to shareholders of the Narev exit.

I cannot emphasise too strongly that the Federal Court will do its job and first of all determine CBA’s guilt or innocence and then, if guilty, determine the penalty on the basis of the evidence presented to the court and the statutory ­requirements. The avalanche of commentary is related to the market, not the court case.

The Reserve Bank governor’s statement to the federal parliament’s house standing committee on economics was biting when you isolate three points:

• The issue (Austrac claims) is “very” serious and if shortcomings are identified, the bank needs to be held to account both through the courts and internally within the organisation.

The words “held to account through the courts”, while they were directed to the parliamentary committee and not the courts, are inconsistent with a “flea bite” fine, assuming the bank is found guilty. And the words “held to account ­internally” made Narev’s position unsustainable.

• Banks should not be laundering money and they should know who is opening the accounts they open. Just what happened with the new CBA accounts is not clear, but Austrac mentions that 778,370 ­accounts were opened. Again there had to be management changes when the Reserve Bank talks about money laundering in those terms.

• Public trust in Australia’s largest company had been “strained” and “service has taken a back seat to sales”.

That’s a direct criticism of the management of CBA led by Narev. He had to go.

Austrac has undertaken an ­incredibly detailed examination of what the CBA has been doing and the statement of claim extends for hundreds of pages.

It is not inconceivable that the Reserve Bank governor will be called to give evidence in the court case based in his testimony to parliament.

Then last weekend ASIC’s Medcraft revealed that he had a conversation with CBA chairman Catherine Livingstone two days before the Austrac announcement, and she did not mention it. That revelation gobsmacked me. It indicates that the CBA has not taken these issues seriously — the reverse of the Reserve Bank stand. Maybe the chief executive can be blamed for that.

That’s a cocktail that an ­aggressive prosecutor would present to the court.

I am sure CBA is now taking the issues very seriously, and indeed the chairman has formed a subcommittee of directors to handle the matter and Narev’s departure date has been announced.

My guess is that CBA’s off-the-record briefings to analysts last week stopped any share-selling panic and greatly limited the ­impact on the market.

That was good damage control by CBA, but unfortunately they did not alert the market to Narev’s departure. The saga has a lot further to go.

For example, the whistleblower who alerted CBA two or three years ago to the culture in the technology area will emerge.

CBA shares have been heavily shorted because traders believe there will be a home-lending crisis. You will see some active anti-CBA stories promoted by shorters as they seek to make a profit.

The market has always placed CBA on a higher price-to-earnings ratio than the other banks.

It is a premium that CBA has justified because overall its profit performance has been better than its rivals.

A major court case of this ­nature usually affects operations, because people become less ­focused. It will take some very skilled management led by the new chief executive to keep the bank powering ahead of its rivals.

It is in this context that the ­Reserve Bank governor issued that indirect warning to shareholders, that “service had taken a back seat to sales”.

The bank would argue with him on that issue because of its high customer rankings, but there is little doubt that the drive for profits saw security take a back seat.

It is extremely hard to quantify the unknown when it comes to share prices.

But there can be no doubt that the dangers of this situation to CBA shareholders have been increased by the statements of Philip Lowe and Greg Medcraft.

If there is a small fine ($500m or less) it can be managed within the operations of the business without calling on shareholders for extra capital, particularly as CBA has a buffer.

But if the fine gets a lot larger then it will in fact be a fine on shareholders, because capital will need to be raised to cover and maintain capital requirements.

If we do have problems with housing loans and/or North Korea, then the looming court case will ­become a much heavier market burden.