Banking News

CBA’s head of institutional banking backs current strategy

(29 August 2016 – Australia) The Australian reports that Commonwealth Bank of Australia’s (CBA) institutional chief Kelly Bayer Rosmarin has defended her division’s current strategy.

She has told the publication that the strategy was “producing ­industry-leading returns” and noted that the hurdles facing the sector would not last forever, including increasing competition from capital-flush Asian competitors.

The Australian notes that CBA’s institutional banking and markets division is the bank’s third largest by earnings, however, returns were down 9 percent to A$1.16 billion for the year ending June 30 according to the banks’ latest results.

According to The Australian, Rosmarin said that the market did not have a thorough appreciation of how the bank’s institutional strategy differed from rivals and returns remained above the unit’s cost of capital.

“People are nervous about the returns that can be generated on a sustainable basis out of institutional businesses and they have good reason to be concerned if you look at the global performance and the ROEs that are out there,” she told The Australian.

“(But) I think we’ve been very clear this business returns above the cost of capital and we intend to keep it that way … through the cycle. That doesn’t mean there aren’t points in the cycle where it’s really tough for all institutional businesses …(like) right now.

“But if you think about it, if you step back and say every institutional business is finding it tough to make returns, they’re all going to look for ways to improve those returns, that’s a pretty good spot to be in if we are already above the cost of capital.

“We’re very well positioned to ­capitalise on what comes next.”

Rosmarin added that the bank’s business was skewed more toward higher-value structured products such as project finance, which “extracts better returns than plain vanilla lending” from the use of the group’s balance sheet.

She also said that her strategy was focussed on the industry rather than geography, which permitted CBA to be “very picky and choosy about which clients we want to deal” with.

“We’re not driving our business to say ‘we’ve got 100 people in London, drum up some business.

“If there aren’t great deals to do in London, we’ll just sit out of the market while the risk return doesn’t meet our hurdles),” she said.

Rosmarin also highlighted that the bank’s strategy allowed it to reallocate resources to where it’s needed, saying: “Because we run our infrastructure (globally), we’ve been able to do other deals in Europe at the moment. There is still activity in infrastructure on a global basis, even if this period in Australia isn’t.

“(It’s) exactly why we like our industry-led rather than geographically-led (strategy), because we’re not sitting here saying to the Australian team, ‘what are you people doing, you’re not doing any activity?’

“We’re sitting here saying, ‘great we’ve got a deal team that’s focused on something happening in another part of the world’.”

She conceded cost growth of 11 percent for the year was “above what you would like to see on a long-run basis” but claimed this would slow, as occurred in the second half.

Rosmarin suggested that some headwinds such as soft economic growth, low interest rates, excess liquidity and intense competition were “cyclical”.

“It just might be a very long cycle at the moment, (but) we know that’s not going to last forever — but it is very intense.” She added that unlike retail banking where mortgage and deposit interest rates can be repriced to offset higher costs, that was not possible in institutional banking where “you actually have to do that deal by deal”.

“And it’s hard to do in a globally competitive market because you’ve got competitors in there who’ve got completely different funding costs from you, like the Japanese banks. They’re being paid to lend, so they might make very different decisions that you would and that sets client expectations and those banks are very ­active in Australia,” she said.

“The Japanese, Chinese, Korean banks, if you have a look at the ... league tables, the proportion of syndicated debt provided by the Australian banks to Australian companies has been declining for six or seven halves and is below 50 percent this most recent half. That is definitely happening and it ­increases the pressure on margins.

“It’s the excess liquidity, it’s what happens in low interest rate environments so it’s there for a while but eventually that does change and you have to run these businesses over the long-term.”