Will CBA scandal have a long term impact?

Anton Tagliaferro, investment director at Investors Mutual, talks about whether Ian Narev will survive as CBA CEO following money laundering allegations

Introduction: Commonwealth Bank long term impact?

Ross Greenwood: Welcome back to Money News right around Australia. I want to take you to the Commonwealth Bank. Now, the share price fell today a little over 1%, will come to the markets a little bit lighter for you. But the other thing also is it comes off the bank, of the Commonwealth Bank Board, making an announcement this morning. That it basically will get rid of all short-term bonuses for its team of 11 Senior Managers. Now, tomorrow the Commonwealth Bank will announce its annual profit, which is expected to be around $9.8 billion.

It’s a strong result, there’s no doubt, and under normal circumstances those Executives would be remunerated very very handsomely. The other aspect of what the board said today is itself will take a pie cut of some 20% over the course of this financial year going into June 30 next year. The reason for that, that was quite specifically put by Catherine Livingstone, the Chairman of the Commonwealth Bank, is in relation to the allegations that are being put against the Commonwealth Bank by the Money Tracking Agency, AUSTRAC.

Now, the question is whether this is appropriate or whether this is something different, is really being divided now in the investment community. Because on one side of it, of course, nothing has actually being tested in a court of law which would determine whether the Executives have done the right or the wrong thing, but then there’s also this comprehensive brief that is being made public by AUSTRAC which really does document check or inverse its allegations against Australia’s largest bank. The question is, what should an investor do? As I said, the share price has ricochetted around the place just a little bit in the last period of time.

The other thing also on the very bottom of that note is from the Chairman Catherine Livingstone is that Mr. Narev, that is Ian Narev, the Chief Executive, retains the full confidence of the board. Now, one person who has a vested interest in all of this is Anton Tagliaferro. He is the Investment Director and the Founder of Investors Mutual and like many big bank managers in this country has an interest in those Commonwealth Bank shares, therefore, an interest in the outcome here. Anton Tagliaferro joins me now, many thanks for your time, Anton.

Interview: Anton Tagliaferro, Investment Director and Founder of Investors Mutual

Anton Tagliaferro: Thanks, Ross.

Ross Greenwood: In regards to this issue, one point about it, I suppose, is that the Commonwealth Bank already has one strike against its remuneration report from shareholders at its annual meeting last year. If there is a second strike against the bank’s remuneration report this year it means there’s a spill of the board, because two strikes can effectively they have to spill the board. Is this one reason you think that is motivated the board in the way it has?

Anton Tagliaferro: Yes, definitely Ross. I think given this publicity and given the fact that they did have a first strike against the last year. They want to be seen as taking immediate action and quite drastic action in terms of cancelling the short-term bonuses and taking up pie cut for the board itself.

Ross Greenwood: Do you think that this drastic action wasn’t actually necessary to go as far as they have?

Anton Tagliaferro: Ross, look, it’s hard to say. I think, again, the bank and the board wanted to show that they’re taking the allegations seriously, that they backed it straight away and, as I said, that they’re ensuring that shareholders can see that they’re taking immediate action.

Ross Greenwood: As a shareholder in the bank, have you currently view this situation, how do you try and weigh up the gravity of it? Because, as I say, it is not being tested in the court of law, these allegations, the bank says it will defend itself against the allegations and try to weigh up what sort of penalty, if any, might be imposed in the future. That’s something right now that is important to a Commonwealth Bank shareholder.

Anton Tagliaferro: Yes, Ross, look, I don’t think this is– while it is– the allegations are serious and then, obviously, there is– it doesn’t reflect well on perhaps some of the controls within the bank. I think people are going to keep it in perspective as well. The Commonwealth Bank is a bank with a trillion dollars in loans and 50,000 employees. It’s going to announce a profit tomorrow of almost 10 billion as kept as 140 billion. Again, we’re talking about a very small percentage of the overall transaction.

The Commonwealth Bank probably processes, I don’t know what the number is, but probably $2 or $3 trillion worth of transactions a year. We’re talking about $600 million worth of transactions which, as I said, by itself sounds like a large number, but in perspective for the entire bank it’s not that significant. As I said, while the allegations are serious, I don’t think financially it’s going to have any material impact.

Ross Greenwood: Okay. Now, there’s the other side of it which would be the political risk for the bank. Because, quite clearly, you’ve got independents such as Nick Xenophon there calling for criminal sanctions against directors who do the wrong thing and breach some of these money laundering reporting provisions. Clearly, there’s also the threat of a royal commission against the banks generally, which is coming in from the labor party. Is that another risk that the investor needs to assess when they’re looking at the Commonwealth Bank?

Anton Tagliaferro: I think those risks have been there for a while. The bank bashing has been around for a while. As we saw in the last budget, the tax that was added was obviously because of the pressure on government to tax the banks because they are making a large profit. Yes, it doesn’t help in that regard but, once again, I think there are much more material things which really impact the banks’ profit than the current AUSTRAC allegation.

Ross Greenwood: The other point also is that, I know that the treasurer Scott Morrison has spoken with the Commonwealth Bank Chairman Catherine Livingstone, and effectively says that all options to take action against the bank remain on the table. In other words, the government itself is not holding out any olive branch, offering any promises to the bank, I would imagine that that is the way it should be simply because the legal process has got to be gone through before you get to the end of this process.

Anton Tagliaferro: Not quite 100%, Ross. But again, I would point that there are 50,000 employees within the Commonwealth Bank. Obviously, the board of directors and the managing director can’t watch every day what every employee is doing or what every system is doing. Obviously, there’s been a weakness in some internal control, obviously, some IT systems went up to scratch. Clearly the banks have things within the organization like internal auditors, whatever. The CBA is going to, obviously, have a good look at all those departments to understand how this breach occurred.

As I said, I think to hold the CEO or the board of directors responsible for every transaction within the bank is totally — for an organization the size of the CBA, is a little bit far fetched, I think. Although they are accountable, they are responsible, hence why they’re taking the actions today to show that they are taking the allegations seriously, and until they have the full answers, those cancellation of bonuses, etcetera, will stay in place.

Ross Greenwood: Just a final one. You and your own holdings inside the funds of Commonwealth Bank shares, are you changing your attitude, strategy towards them at the moment?

Anton Tagliaferro: Not greatly, Ross. We’re a little bit cautious on the banks anyway. Obviously, the housing market in Australia, the banks are benefiting at the moment from very good– quite economic conditions from strong housing markets in places like Sydney and Melbourne and their bad debt provisions are very low. So we’re a little bit cautious on the banks anyways. We’re not holding — they’re not the biggest parts of our portfolio. A little bit, look, again, if the CBA gets oversold on what we view as relatively immaterial financial events like happened today, then we may look at them.

Ross Greenwood: So you heard Anton Tagliaferro, the Investment Director and also Founder of Investors Mutual, an investor in the Commonwealth Bank and hear it’s underweight their at the moment, but also saying that maybe you should not look to see this situation overblown until, really, it has gone through the courts which could take quite a long time. Anton Tagliaferro, as always, we appreciate your time here in the program.

Anton Tagliaferro: Pleasure, Ross. Thank you very much.

Other Commonwealth Bank long term impact related stories

09-08-2017 9News: CBA Boss speaks out

09-08-2017 CBA CEO- Should he stay or Should he go?

09-08-2017 Commonwealth Bank’s intelligent deposit machines scandal overshadows $9.88b profit

09-08-2017 Money Minute – August 9 2017 CommBank Slashes Bonuses

09-08-2017 Treasurer Scott Morrison: Its not looking after your customer, its taking them for granted

08-08-2017 Money Minute – August 8 2017 CommBank’s Legal Fight

07-08-2017 9News: CBA in Damage Control

07-08-2017 Commonwealth Bank money laundering allegation

07-08-2017 Money Minute – August 7 2017 CommBank Defence

07-08-2017 Pressure intensifies for royal commission following CBA laundering allegations

03-08-2017 Commonwealth Bank accused of money laundering

12-05-2017 9News: CBA CEO hits back at bank tax

12-05-2017 Bank Tax War – CBA CEO Hits Back at Bank Tax

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