Too big to fail

Mike Taylor writes that the Commonwealth Bank’s results announcement and its continued standing in the eyes of consumers suggests its financial planning woes have represented little more than superficial damage.

Nothing is impossible, but events over the past month suggest that the Commonwealth Bank (CBA) falls into the category of being “too big to fail”.

Not only have those events suggested that CBA is too big to fail, they have suggested that it is too big to sustain significant collateral damage from events such as the problems which have plagued Commonwealth Financial Planning and the campaign that has been pursued by major metropolitan media outlets.

If there was any doubt about how raw scale can counter adverse publicity then it was last week’s announcement to the Australian Securities Exchange (ASX) of the Commonwealth Bank’s annual results. Only those with a finely-tuned nose for corporate spin might have noted the manner in which CBA chief executive, Ian Narev, studiously avoided any direct mention of the events impacting Commonwealth Financial Planning but managed to reference how many people his organisation employed and how much business it generated for small and medium-sized enterprises.

It is not often that in the midst of discussing a net profit after tax of $8,631 million, a bank CEO also talks about making “significant contributions to support individuals, charities, sporting organisations and communities right across Australia”.

Nowhere within the context of the CBA’s media release was there any particular reference to Commonwealth Financial Planning. That detail was buried on page 34 of its more than 100 page results documentation wherein it revealed that its Wealth Management division had recorded a cash net profit after tax increase of 17 per cent, and that it was not expecting to be unduly hampered by the costs flowing from the compensation and other remediation arrangements entered into with the Australian Securities and Investments Commission (ASIC). 

The ASX announcement stated: “The Group has provided for the licensee conditions in Commonwealth Financial Planning and Financial Wisdom Limited and has separately announced an Open Advice Review program for customers of CFP and FWL who received financial advice between 1 September 2003 and 1 July 2012.” 

“As this program has only recently commenced and the outcomes are therefore uncertain, the Group considers that provisions held are adequate and that the overall costs of the program will not be material to the Group results”.

In other words, the licensing conditions imposed by ASIC and the compensation arrangements which will flow from its Open Advice Review program may carry a significant cost, but not so significant that those running the bank’s Wealth Management division feel need to be unduly worried about it at this stage.

Taken together with the results of the recent Roy Morgan Consumer Bank Satisfaction research, the annual results suggest that while Narev undoubtedly has reason to be angry and concerned about the negative publicity his company has been receiving, he knows that the damage has been largely peripheral and has not unduly impacted the bank’s major business lines.

The Roy Morgan research, conducted at the very same time as major media outlets were hammering the bank over its financial planning operations, found that in the six months to June 2014, the CBA maintained its leading position among the Big Four with 82.1 per cent satisfaction.

Narev might have taken that data and combined it with the broader positive performance of its banking operations to quieten any expressions of concerns from among the members of the bank’s board.

It will also not have been lost on Narev and his board members that irrespective of the negative publicity, there is a large proportion of the general public who regard the Commonwealth as both large and safe and more than capable of underwriting the delivery of compensation should anything go wrong.

Indeed any reading of the results posted on the ASX by the major banks in the past month tell a similar story – highly profitable institutions which have carried a Government guarantee and which are much too big to fail.