Company Interview / CBA beats the street

Matt Comyn, CEO of Commonwealth Bank (ASX: CBA), discusses a 2% drop in the full-year profit influenced by competitive intensity and increasing expenses due to inflation. Despite this, Comyn says that CBA managed to raise the full-year dividend to $4.65, benefiting over 13 million Australians who engage with CBA either directly or indirectly. Matt expresses surpirse at CBA's valuation, nearly double that of other major banks. Nevertheless, the focus remains on fostering customer relationships and providing quality service while bolstering customer security and protection.

Comyn says that CBA exhibits a strong commitment to assisting customers during financial distress. They proactively reach out to customers and put temporary repayment plans in place to mitigate financial hardships and ensure that loans are repaid quickly. Despite the pressure on lower income households due to inflation and higher prices, arrears remain low historically. The fact thatunemployment remains very low contributes to this scenario. Matt recognises the challenging times ahead for households due to an extended period of lower economic growth.

Matt appreciates the vital role of brokers in their home loan distribution channel, but emphasises the benefits of a direct relationship with customers. CBA has a clear strategy in reaching out to new immigrants and young adults. The bank effectively leverages their significant brand reputation, physical distribution, and world-class digital experience to capture 64% of new immigrants and 46% of young adults. They also acknowledge the struggles faced by small business customers, particularly those with less financial resilience, and pledge their ongoing support and service for them.

Full unedited transcript:

0:00

Well. Overall, our profit was slightly down over the full year, down 2%, which was driven. Notwithstanding good volume growth across all of our businesses, margins were a bit lower, which is a sign of the competitive intensity. Like many businesses, our expenses were up due to inflation, but notwithstanding that, we were able to, given the strong position and strong capital holding, we were able to increase the full year dividend to $4.65, fully franked, which should be good news for the more than 13 million Australians who own the Commonwealth Bank, either directly or indirectly. Yep, absolutely. Hey, you're the most expensive bank in the world. 23 times earnings. You're valued at almost double the other big three banks. Uh, here in Australia, you valued as a growth stock. Are you are you stunned by that, that the market puts you on such a pedestal?

0:58

Well, we focus obviously on the things that we can control, which is, you know, obviously ultimately our earnings. But even within that, we focus a lot on our customer relationships, doing a great job for our customers every day. And in the context of the full year, how we can both support their growth but also support our customers where the assistance is needed across 13 million. Uh, we've got a business at scale. We're able to make big investments in our technology and our customer experience. One of those that we think is really important. In the last year, we've spent $2 billion with our across our investment portfolio, but more than $800 million in protecting our customers from scams, fraud, financial crime. We've got 4000 people working to protect our customers and the broader community. We're lucky that we have more than 1 in 3 Australians consider us as their main bank. 1 in 4 businesses consider us as their main bank. So we feel very fortunate to be able to serve so

1:58

many Australians. We take that obligation really seriously and try to do the best job we can every day. I mean, it's obviously up to the market in terms of how they reward that. Hopefully stability, consistency and being able to show improvements on an ongoing basis. Yeah. Um, of course, you've had lots of briefings since announcing the results this morning, including with all the banking analysts. Were they a bit sheepish? Every every banking analyst in the country has had a sell on Commonwealth Bank's shares for the last nine months. Did you? Did you have a chip at them?

2:35

No we didn't. Um, look, if there's one that's they've got a job to do and we absolutely respect that. I mean, as a company and a big listed company, if, uh, an investor or an analyst in this case has a, a sell, but it's on valuation, it's probably about the best rating that you can have. And it's obviously up to us to be able to continue to deliver and slightly outperform. We beat consensus earnings today. We think a number of the competitive advantages that we have serve us well going into the future. We know from talking to our investors both large and small, how much they value the stability and the consistency. Obviously in Australia, given the the tax system that you understand well, those fully franked dividends are very valuable. We think that scale, customer base, technology, competitive advantage and the ability to be able to generate a reliable, fully franked dividend over the long term means the valuation is is well supported

3:35

both domestically and internationally, and it's up to us to continue to deliver that every day. And, you know, the market will value us appropriately over time. Yep. Let's talk home loans. It's the basically the biggest party of business. Are you stunned at how good a shape your home loan book is in given the economic environment. The cost of living crisis?

4:02

Yes. I mean, there's sort of two sides that obviously we see clearly every day how many households are finding the circumstances at the moment harder and harder with, you know, just higher prices and inflation. We know that that has an effect on everybody and particularly to lower income. We know that for many of our customers, they certainly feel like they're having to make real sacrifices. They are preferencing to make sure that they're repaying their loans and quickly from home lending perspective. So as you mentioned, notwithstanding the arrears whilst they're up. So that's the proportion of customers who are behind in their repayments. They're up over the year as we expected. They're still against very low historic levels. But we've been really focused on making sure we've, you know, been extremely proactive this year in terms of reaching out to customers and being able to help them provide financial assistance where they need that a number of a record number of sort of temporary repayment plans to help customers get through some of those

5:02

difficulties. And that's one of the benefits of being, you know, a large at a very strong financial institution is we have a lot of resources, in this case, financial, to be able to draw upon, to support our customers against, you know, the broader environment. But of course, unemployment remains very low. And that's the biggest driver of of losses in a financial institution. But, you know, we try to make sure that we're there to help our customers whenever they need us. Yeah. Those customers have hung in so far. How sensitive are they to another interest rate hike or a weakening in the economy? Are they are they getting towards breaking point?

5:43

Well, I think the proportion that are under, you know, real pressure and you can see that just in terms of even if they're not behind on their repayments, just where people are choosing to to spend and particularly discretionary spend. I think a lot of households across all age bands are feeling the impact of higher prices. I think we hear consistently that people feel like they've got less left over, they've got less to sort of enjoy on some of the things they would otherwise like to. So, you know, we're going through a period of low economic growth over GDP is the lowest in sort of 30 years. It's still positive, but it's a much lower growth. As we look forward into 2025 and beyond, we think there'll be a rebound, as does the reserve Bank. And, you know, household income. And some of that's going to be obviously aided by inflation coming down. So it's definitely a difficult period. I think it's going to be challenging for the rest of the calendar year. I don't see a rapid deterioration, but certainly we expect more and more people just feeling that pressure for longer.

6:43

It's a difficult time that's reflected, um, certainly increase in sentiment and attitude and also just our personal experience dealing with customers. And I'm sure you see a lot of that as well. Yep. Um, look, 72% of all mortgages in Australia are sold through brokers at the CBA. 66% of your home loans are direct to customers, or only 34% through brokers. Has this been a good strategy for the bank to to build that? That direct link with customers, rather than through an intermediary helps you monitor the customer, but also improves your margin?

7:25

Yes. And look, the broker channel, which has really been growing since the mid 90s, as you know, is an important distribution channel and will remain so for for CBA into the future. But as you said, I think like any business, if you if you can, you'd prefer to have a direct relationship. You're dealing directly with customers. We certainly believe there's benefits from our customer's perspective and from ours. We've got a very large what we call our proprietary lenders almost 1800. And so, yes, that's been a real focus, uh, for us. And we see it as very much complementary with how do we serve our customers and be their main bank, how do we make sure we provide the best experience, and we also reward and value their loyalty for banking with us? Yeah, I love your strategies. Explain more about customer acquisition. As you said a bit earlier, a third 35% of retail bank customers bank with you. The

8:25

next biggest market share is 16%. But you managed to grab 64% of new migrants and 46% of young adults bank with you. Are they deliberate strategies and have you done it?

8:43

They definitely are. And that's a strategy that we've followed now for many years. And a big driver of that is, you know, in a banking market, the two sources of of customer growth where new customers come from are people, obviously, who are born and become young and ultimately adult, or those that move into Australia. And we have different strategies in each of those. I mean, we we're very focused on migrants, even though a number of those are, of course, temporary migrants. And that's reflected record levels of migration being the biggest financial institution, very well known brand, the biggest physical distribution, known for having the best digital experience really helps us. And as you said, it's one of the highest scores we've ever seen in terms of a proportion of migrants are choosing the Commonwealth Bank to be their main bank. And then, yes, trying to bank, uh, Australians who are, you know, are born here. Um, and we focus very much on, on youth and making sure we've got a really good digital proposition in particular is, is very important. And so it's a

9:42

continuation of that strategy, as I said, which we believe has served the bank very well. And obviously over time we've moved from what was, you know, much more of a physical distribution, whereas now complemented, I think, equally importantly, by a very strong digital or mobile banking experience. Yeah, you're very humble with, with those strategies because the results are just mind blowing to think you've got 46% of young adults who have no loyalty to anybody, let alone a bank, and they bank with CBA is incredible. Just quickly, before I let you go, we've talked about home loan customers, small business customers, and how are they going at the moment. Are you concerned about them?

10:30

I mean, we are, and in the same context as we are across many households, I mean, we're seeing certainly particularly smaller businesses as well, which perhaps have, uh, you know, less operating history, maybe, uh, less financial resilience. Um, we see more challenge, uh, there certainly. And then there's some sectors of the economy. You can imagine in the discretionary spend or retail trade, that can be a more, uh, challenging set of circumstances. Clearly, there's been, um, labor shortages, problems around sort of pricing in areas like construction and, you know, subcontractors through to commercial development. That's obviously critically important in terms of making sure we're building a sufficient supply of new housing, uh, into the market. So, you know, again, we're certainly there to support our customers. We're not seeing that turn up in, uh, in credit losses, as you mentioned earlier. But we know that this is a really important time, I think, for people, there's a lot of anxiety and uncertainty about

11:30

exactly what the outlook is on the economy. And, you know, I do definitely think, you know, better times are ahead. But realistically, I know it will be a challenge for many of our customers for the rest of this year. But most importantly, we're here to help and we're here to serve them