Mr. Johnston began our meeting by providing CBA’s views on the Royal Commission interim report and the banks expectations on what’s going to roll out in next 6 months before the final Royal Commission report is published, noting (in the words to the effect of), “I think the report largely said that there are plenty of legislations, it’s not fundamentally flawed, it needs to be observed and enforced…I think the comments were directed towards the industry and the regulation of the industry and not just major players…the industry is well regulated with legislative tools and the practice needs improvement from the participants and the regulators in a variety of areas…it did not address the proportionality of the misconduct of the overall business of the industry and the sector.” Mr. Johnston thinks that most of the banks have already dealt with the issues that Royal Commission highlighted and going forward there should not be any new regulations coming up.

Mr. Johnston noted in the words to the effect of, “We have a target of calendar 2019 but the actual date will be driven by all the work that have to be done and also responding to market conditions for wealth, as it is a demerger you have to take account of appropriate market conditions and can’t ignore market conditions and liquidity…so that’s where we are at, deeply into the work and working for a timetable of calendar 2019.”

Mr. Johnston noted, “I think as has been examined, it is one thing that is easily talked about, about the enquiry borrower by borrower and when you multiply out the volumes and the adequacy and clarity of tools to do that in an efficient data driven way, that’s where the task starts to balloon because borrowers have multiple accounts and their openness of data account to account, that’s why there has been progress and APRA has been extremely active in this. APRA has been leading the charge on disposable income for 4 years now with institutions that regulate, and the data is not very clear…that’s where the cost of complying and supporting good decision making can go up because some of this stuff becomes manual and data driven. There has been a very strong push by institutions in APRA to drive down that path and tight costs eventually and there has been a lot of progress on that…we all need to step back and think if compared to 5 years ago, are we in a better or worse place and I think we are in a lot better place, there is a lot better knowledge about what are the effects of stressed payments…the industry certainly the majors now understand vastly better what the levels of disposable income impacts are and that’s what comes down to…and it has taken bodies and investments and systems to do that and for us we had some particular things we had to do which have driven our compliance costs but they have escalated temporarily and we don’t think they are permanent but that’s why we have taken provisions…the other thing that’s happening in the background is everyone is investing in data and systems and the industry historically hasn’t spent on that, and it will be a good catalyst for improving quality but it has also taken costs.”

We were curious to know how the bank stress test’s the scenarios on which Mr. Johnston noted in the words to the effect of, “There are a lot of stress test that we do but only publish one of them because that’s what we have always been publishing…the thing to look at going forward for us is that we are moving to IFRS9 and the new provisioning takes into account your base case and upside case assumptions when you are doing modelling and you get more read of what the outlook is based on…when we look at cash rate we stress test with buffer in terms of we are looking at people’s serviceability…”

Mr. Johnston noted, “no one is immune from spread levels but it’s also back to the bills liable swap that’s relevant…if you clock back 3-4 months and the companies were saying they are struck, they can’t raise, politically unacceptable basis risk is here to stay…and see what 3 of the 4 majors have since raised rates on the basis of funding costs…if institutions can point to a very clear case of solidly elevated funding cost then yes couldn’t agree more on risk…pricing the back book for margin maintenance is not going to be available to Australian banks…I think dealing with the cost line is doable.”

Mr. Johnston thinks that till the time the system is growing broadly in line with the GDP growth, the economy should be quite stable noting in the words to the effect of, “it’s been clearly demonstrated how trends in the benefits are of that price led competition in terms of holding the share as you are going through it…we are happy to perform under the system growth and so you would have seen us take some steps to make sure that our decisioning and everything else that is crucial to getting the volumes up, and turnaround time is a big factor there, making sure that it’s all working…my bigger picture comment to you would be that we feel that till the time system growth is much closer to GDP growth is a very good and sustainable outcome for the economy…it builds economic problems in any economy where a particular sector of credit growth is so outstripping the economic growth…we think it’s in the long term health of the Australian economy for this credit growth to pull back…ultimately you have to look at the longer term picture and institutions like the majors in Australia, their overall health can’t be diverse from the overall health of the economy…the question is then going to be making sure at those lower volumes for the industry and the participants, are you handling properly the volume margin trade and therefore the return on capital and we have demonstrated that it has always been our focus.”

Mr. Johnston noted in the words to the effect of, “We have managed from a long time a payout ratio of 70-80%…that’s the big factor to be consistent year in and year out but we can have some extra ordinary circumstances like paying a fine, where we try to maintain a dollar level and if though there are structural or business settings then underlying earnings and payout ratio would decrease…we will manage the underlying business very hard to achieve the target payout ratio…the franking credit policy of the labour government is pretty uncertain and we can’t predict the effect on trading prices but we will keep the target payout ratio whether the policy comes in or not.” We think the bank can continue to support its target payout ratio if they are able to manage the underlying earnings of the business.

Mr. Johnston noted in the words to the effect of, “we think we still got share to take, in business banking we don’t think we have performed to what our opportunity is there and while we have taken some very clear steps to optimise our institutional business, that’s very much in line with what we are doing to really sharpen our focus on productivity and provide adequate returns on capital…we still see opportunities in institutional business and we will continue to optimise the institutional business with very much focus on returns…it’s the competition from other areas that we really have to think about like fintech’s.”