`people's Bank' Transformation Is Complete As Cba Profits Soar

``The Commonwealth Bank had been pleased to opt out of some of its home loan exposures."

THE Commonwealth Bank's massive $454.5 million half-year profit announced last week demonstrates just how far the former ``people's bank" has moved into the commercial mainstream.

The markets apparently had not realised the extent of the bank's transformation in recent years and were surprised by the 45.5 per cent earnings jump.

That transformation, which has been good for the bank's investors, has also seen the loss of 6500 jobs in Victoria with a further 1800 likely to follow. It has also seen the bank increase fees and charges and move from a public service to a more private sector operating philosophy.

Stockmarket pundits had been tipping a big result for CBA, but what raised eyebrows was that in the six months to 31 December 1994, the bank's profit was about $40 million or 10 per cent higher than market expectations.

Interest rate margins and lower-than-forecast provisions for bad debts (about $20-$30 million less), the improving economy and increased efficiencies gave the bank the stunning 45.5 per cent improvement over the same period in 1993.

In response to the interim performance, analysts have upgraded the Commonwealth Bank's forecast 1995 earnings by about 10 per cent.

Prospects for 1996 also have the analysts upgrading expectations for the bank by 5 per cent, while the share price went to around $9 from $8.60 after the profit announcement.

CBA is not alone in this optimistic scenario with forecasts predicting solid earnings for all of the major banks. Estimates for the CBA are around $980 million for the full year.

In the past four years since floating, the Commonwealth Bank has restructured its operations to take on its more commercially oriented competitors.

However, the overhang from the people's bank days also proved beneficial in the last half. The CBA still has a larger share of old style, low interest passbook accounts than its competitors and this helped to boost earnings when lending rates rose against this static deposit interest rates. Across all operations greater interest income was earned when an expected squeeze on margins did not materialise, one analyst said.

According to another analyst: ``The result was generally better than expected and margins particularly held up better than expected."

In Victoria the CBA has been losing market share as former State Bank customers desert it in favor of competitors, particularly the Bank of Melbourne. Some analysts have been surprised by the level of this decline saying it is greater than they expected.

Ms Fiona Mason, state marketing manager for the Bank of Melbourne, confirmed the trend saying the bank had gained an average of 9000 new deposit accounts each month in the past year and most of this custom appeared to be coming from the CBA.

A former manager at the CBA in Essendon, Mr Tom Davey, confirmed the bank had been losing clients and believed losses in accounts had included both small depositors and business accounts. Much of the outflow had gone to the Bank of Melbourne and the National Australia Bank, he said.

Mr Davey said he believed staff loss in branches contributed to the loss of custom despite lower fees at the Commonwealth. ``A lot of the customers were very unhappy about the sale of the State Bank. We tried very hard (at the merged bank) to retain business at all costs, but it didn't seem to matter.

``What I found surprising is that they didn't mind being charged more at the new bank," he said.

Banking analyst with CS First Boston, Mr Andrew Turner, said CBA had lost considerable market share since the merger with State Bank Victoria in 1990 but concerns over this had been overplayed.

``There's been a bit of alarmist reaction on that (market share loss). Some people have looked at it and they've got it slightly wrong. The fact is, the bank has lost some market share in Victoria for obvious reasons. It's been trying to bed down the SBV acquisition and (there is) a natural rationalisation taking place."

In Victoria in 1990, the CBA held 13 per cent of the state's total market share in business, personal and housing loans. After the State Bank acquisition, it jumped almost 20 per cent to 32 per cent. Four years later, the figure had shrunk to 25 per cent, said Mr Turner.

``They've shed a little bit (of the new market share), but not even half of it. It's quite understandable that would have happened given the conditions the (State) bank was in when it was purchased."

Mr Turner said that adverse publicity frightened away State Bank customers and branch closures and other rationalisation moves aimed at ending duplications after the merger had also caused a loss of business.

``We don't find that alarming at all. In fact, if anything, through 1994 the bank's market share started to bottom out at around that 25 per cent level," Mr Turner said.

CBA had lost market share Australia-wide, Mr Turner said. However, this appeared to be levelling out and the bank's national market share was now stable at about 19 per cent, he said.

In a major move away from its traditional role CBA has shed almost one third of its share of Australia's home loan business since 1990.

The bank's stake in the national home loans pie was now 23 per cent compared with 33 per cent five years ago.

``That loss has been partly deliberate because it's become a very competitive area," Mr Turner said. This competition had cut the profitability of home lending and the CBA had been pleased to opt out of some of its home loan exposures, he said.

While most analysts agree that increased commercialisation has seen CBA drop market share in all states except its traditional home of NSW, some say the haemorrhaging has not stopped.

``By now it should have stopped. It's probably more of a surprise to CBA than other banks which have marketed themselves very cleverly to take advantage of the CBA restructure," one analyst said.

Mr Turner, however, remains sanguine about the loss of market share saying the restructure of recent years has pushed the bank into more profitable business areas. This higher margin business was `` obviously better for CBA and for CBA shareholders. So the loss of that market share is by no means disastrous," he said.

Mr Turner said the bank was now on a more commercial footing having cut staff, rationalised branches, introduced new fees and was refusing to engage some competitors in loan fee discounting.

``It's also showing some good trends on a lot of fees and various components of non-interest income. CBA financial services are doing well, there is good growth in total funds under management and the life company has had some good sales as well."

CBA's general manager personnel in Victoria, Mr Ken Lynch, agreed that efficiency measures had resulted in branch closures and a move to more customer-responsive administrative centres.

``We're introducing new and innovative style presentation of our branches for customer comfort, service, efficiency and for the satisfaction of a wider range of financial needs. We will be adding approximately 200 new ATMs to the network before the end of the year in Victoria," he said.

Mr Lynch said the bank was ``on the front foot in terms of performance". He said the Commonwealth had a strong tradition in home loans and in Victoria, ``outstanding balances have grown by $1 billion in the past 12 months. In Victoria, 30 per cent of (home loan) approvals on a week-by-week basis are being approved by the Commonwealth Bank."

The bank's present position met expectations. ``It was always understood there would be some dilution in market activity (in Victoria following the SBV takeover) but it was not greater than we expected."

Mr Lynch said the bank ``certainly has no desire to lose customers and we relish openly our relationship with our customers. In fact, in terms of what we're doing in the network is taking a lot of clerical type functions out of the branches to ensure more customer focus."

The Victorian rationalisation had been necessary because after the SBV takeover the CBA had 776 branches in the state, more than double the number of most other banks. At present, in Victoria and Tasmania, there are 615 branches. Nationally, it operates 1620 branches, while other banks have no more than 1200 throughout the country.

``It's having to trim them down," said Mr Turner of the Victorian branches. ``It's just duplication. Any business would have to close those branches and that would unfortunately entail the loss of jobs.

Promises to retain all staff went against economic logic," he said.