Bank Tax War – CBA CEO Hits Back at Bank Tax

Comm Bank CEO hits back at bank tax

Interview with Ian Narev, CEO Commonwealth Bank

Ross Greenwood: Ian Narev thanks for your time on what clearly has been a shock for the banks, would you describe it as well?

Ian Narev: Well, Ross thanks for having me. And yes, it was a shock in the sense that we weren’t consulted, we had no forewarning. So even though there had been thoughts all the time that there may be a tax on banks, our expectation was if it was going to come, somebody would give us a call and consult us about how to nail down the details and that didn’t happen.

Ross: Who ultimately pays for an increase in bank taxes?

Ian: Well, ultimately this is a tax on all the Australians. There’s a lot of conversation about it gets absorbed, but you know that business well and there are only two places costs go, either to the customers or to the shareholders. There’s no way of absorbing them other than customers and shareholders.

Basically in the banking system, just about all the Australians and the customers of a major bank, just about all the Australians are shareholders directly or indirectly of a major bank. So this is a tax on Australians. For us 800,000 Australian families own the Commonwealth Bank directly and millions more through the pension funds, the industry super funds, the future fund. Probably you and your next door neighbors Ross and it’s not the elite, its ordinary Australians on the banks, and ultimately if it doesn’t fall on customers it will fall on shareholders and are the way this is a tax on all Australians.

Ross: In regards to the return on the shareholders’ equity. Australian banks are some of the most profitable in the world right now. Surely given the fact that they’re amongst the most profitable, more significantly profitable in US banks or British banks, why can’t they afford to pay more tax?

What happens when you don’t have profitable banks

Ian: Well, the whole economy should want profitable banks and we’ve seen around the world what happens when you don’t have profitable banks. Yes we are profitable and the country should be happy that we’re profitable. But number one, despite what’s been said about us being in the most profitable in the world, you only need to look at some of the business savvy media today who have looked into that claim and say, “Well, let’s just not rush.”

But yes we are profitable and that means we’re stable that means we can invest in innovation that means we’re in position to wither our crosses. And ultimately for the Commonwealth Bank, that means the 800,000 families who own us. Rely on us for the dividends, the millions more who own us through their super funds benefit when we’re doing well. That’s a good thing for the economy and we’ve seen around the world what happens when banks are profitable and we don’t want to be going down that path in Australia.

Ross: Banks also require a stable government and economically strong government. A government with a AAA credit rating. Why would it be wrong for banks to share in making the governments economics state strong and ensuring that the AAA credit rating is there for all Australians including banks?

Where can we go to fund it

Ian: Ross, the Commonwealth Bank paid $3.6 billion in tax last year, with the number one tax payer in the country. What we’ve seen here is the government say, “We’ve got a gap in the budget, where can we go to fund it?” and they’ve gone to the companies that pay the most tax. They haven’t looked for others who pay less tax, they haven’t looked for others who pay no tax, they haven’t cut the spending, they’ve gone to the biggest tax payers.

And now the reasons they’ve done that, we’ve had three or four different reasons, it depends on who you’re listening to as to which reason we’re giving. The bottom line here is that they saw successful companies who are already the largest tax payers, they said, “We can go there to get more, because the opinion polls the next day will be positive. We’ve focused not on one of the opinion polls going to say tomorrow as an indicator of whether it’s a good budget but what’s the economy going to look like in two years, three years, and four years.”

Ultimately the success of this budget shouldn’t be judged on opinion polls and backslapping of people are saying, “Good,” on the next day, they must be judged on whether this is a stronger economy in two, three, four, years’ time. That requires a strong banking system.

Ross: You have talked many times about the reputation of banks and about the mistakes that banks have made. Now, from that point of view quite clearly, is this a reason why you believe that the government has sort to come after banks with this tax?

Ian: Ross, you and I have spoken for quite some time about the fact that banks have needed to do better, have made mistakes and we’ve talked particularly in the last couple of years and through the Australian Bankers Association which tells us about the fact that we’ve faced up to date, and we’re making our banks better.

Now, the reality is that in the political climate that we’ve had that has made us unpopular and this is simply an opportunistic grab by the government to say, “Well, the banks are not popular if we go there to fill a budget gap, no one will mind.” The opinion polls the next day I’ll say, “Good on you,” the question is, is it good for the economy? We don’t think so and let’s see how this plays out of the next few years.

Ross: Would you more readily cope this if it was for finite period of time, if it was a budget repair levy that went for let’s say three years?

Ian: Well, the first thing we would ask is consult us, if you’re going to ask us to pay more tax and this is quite a detail structure by supports of liabilities sum in, sum out, so far as we’ve asked questions on the detail of a big number, we’ve been left with more questions than answers. That suggests to us that it was rushed, and something that goes to the profitability of the banking system, the stability of the banking system was rushed, because of the head in them, we’d have all the details now, we’d have the answers.

I can’t yet tell you what the impact of this is on the Commonwealth Bank, then I’ve all the answers. Before we get to how long it should go and obviously we don’t believe it should have happened at all, the first thing we want to know is show us all the details that enable us as the people who run an important business to actually understand the impact, we’ve still got all questions, we haven’t had the answers to.

Ross: Would you say that there is the potential for mortgage interest rates for example, to rise as a result of this measure by the federal government?

Who owns a business, runs a business or works in a business knows

Ian: The critical aspect is, if there is a cost and you know this Ross, you’re very sophisticated in your analysis of business. A cost is either borne by a customer or borne by a shareholder. There’s this issue of absorb and the government’s talking a lot about we’re going to put this scrutiny on you and that scrutiny on you. Maybe somewhere in politics you can absorb the cost and make it disappear. As anyone who owns a business, runs a business or works in a business knows a cost is either borne by a customer or borne by the shareholders, those are the only options.

Ross: So, the answer is yes there is a prospect that mortgage interest rates will rise as a result of this initiative from the government?

Ian: Well, we’ve said this is a big new cost and what we said yesterday is, ‘We’ll do all our stakeholders the courtesy of first getting all the details which we don’t have, then thinking about them and then making a series of responsible decisions over what might be months, and we will do that as we always do weighing the different factors, weighing the balance between the different stakeholders, but people need to understand. This can’t be absorbed and go into the ether, ultimately this falls on every Australian who is a customer or a shareholder of the Commonwealth Bank or the other four banks involved and that is just about every Australian.

Ross: Another aspect of this is in regards to the mining tax. Which the miners rise a very vocal and certainly very popular campaign to defeat the mining tax. Do you believe that Australia’s banks can rise a similar campaign against these potential Bank tax?

Ian: Ross, the first thing we need to do is understand what this tax is. Now, there’s been a lot of questions about how are you going to react, what are you going to do and we’re saying, “Before we even think about reacting, could we please know the details of this amount?” As I say, so far as we’re asking questions, we’re still having a lot of gaps. We’ll understand that we don’t think about what opinion polls might say tomorrow, we think in the long term. We’ll understand all the details. We’ll be very thoughtful about our response.

We understand that in the long term the country can only prosper if there is a constructive relationship between the banking system, its customers and the politicians. I’m sure that when our governments over sees talking to writing agencies, it’s actually saying we’ve got an outstanding banking system, we’re proud of our banking system, it’s a strong banking system, it’s an innovative banking system, you’ve heard them say that.

Suddenly when we’re talking about the politics of the budget, there are all these reasons why the banks should be paying more, we need long term thinking and constructive relationships.

Ross: But you can certainly really force us– the employees, you’ve got shareholders and you’ve got customers, you could argue, all of whom are in the many hundreds of thousands, even millions of people that could potentially be rallied against this tax. Do you believe that something the banking industry will consider trying to rally those forces?

Ian: Well Ross as you can imagine already yesterday morning after the budget, my people were sending me e-mails and calling me. As a result I’ve seen the e-mail to 50,000 staff and I know the CEO’s of the other banks did the same. So that was about 150,000 Australians employed who heard yesterday that this is bad policy because they’re asking us questions and we’ve given them answers.

In my five and a half years I have the Commonwealth Bank. I have never had faster more positive reaction to a communication to staff than I had yesterday. We’re also getting a lot of questions from the investors and I said it, hundreds of thousands actually millions of Australians. And we will respond to them once we had the opportunity to understand exactly what this is. What we can’t do is go out and write to our investors or communicate with them before we got the details, but absolutely they are the owners of the banks, when people talk about those banks. They are talking about all the Australians who own the banks. They have questions about the impacts on their dividends on the share price. They are legitimate questions, of course, it is hundreds of thousands of millions of Australians, and of course we need to be prepared to give them answers to those questions when we are ready to do so.

Ross: In other words, you are up for the fight?

Ian: Well, we’ll up to making sure that we communicate the impact of the tax on all Australians to everybody because we think they deserve not glib comments or responses on the day of the budget or afterward to specific questions to try and get the opinion polls up. We believe that they want and will get we thought through answers when we have had the chance to absolve what this look like and understand the impact on all Austrians, because on all Austrians.

Ross: Ian Narev, as always we appreciate your time.

Ian: Thank very much Ross.

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