Ryan Felsman

Investor Implications from CommSec Economics – What does it mean for investors?

• The Reserve Bank of Australia (RBA) held its official cash rate steady at a more than 12-year high of 4.35% for a seventh successive meeting today, as widely expected, in contrast to central banks in the US, Canada, Europe, UK and New Zealand that have already begun cutting borrowing costs.
• A resilient labour market and sticky housing and services inflation continue to force the RBA Board to retain its higher-for-longer interest rate stance.
• The attending monetary policy decision statement retained the neutral forward guidance that the Board is not “ruling anything in or out” and that “policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range”.
• On inflation, the RBA said, that “inflation has fallen substantially” but noted that, “while headline inflation will decline for a time, underlying inflation is more indicative of inflation momentum, and it remains too high.” The statement also added, “Headline inflation is expected to fall further temporarily, as a result of federal and state cost of living relief. However, our current forecasts do not see inflation returning sustainably to target until 2026.”
• The RBA also reiterated language on the tightness of the Aussie labour market, suggesting that, “Broader indicators suggest that labour market conditions remain tight, despite some signs of gradual easing.” The statement also noted wage pressures had “eased” but the labour market remained “tight” overall.
• So what could cause the RBA to pivot towards an easing of monetary policy?
  • The latest national accounts continued to show anaemic economic activity, with gross domestic product (GDP) rising by 0.2% in the June quarter and annual growth decelerating to 1% – the weakest annual rate in 32 years outside of the Covid-19 pandemic. While the headline outcome was in line with the RBA’s August Statement on Monetary Policy (SMP) forecast, household consumption was well below policymaker’s expectations, contracting 0.2% in the quarter. More timely retail trade and credit/debit card spending in July point to ongoing softness in consumer spending and a desire to save the ‘stage 3’ personal income tax cuts, effective from July 1, 2024.
  • On prices, year-on-year growth in the monthly headline consumer price index (CPI) indicator dipped 30 basis points to 3.5% in July, with the trimmed-mean measure easing to 3.8%. The monthly CPI data for August, which will be released tomorrow, is expected to show a sharp fall in annual headline inflation to 2.7%, reflecting lower electricity prices due to government subsidies, seasonally lower holiday prices and weaker petrol prices. The trimmed mean measure of CPI could slow by 40 basis points to 3.4% in August.
  • Labour market data has also continued to soften. July’s labour force survey showed a 10 basis points increase in the unemployment rate to 4.2%. While August’s data showed an unchanged unemployment rate, a range of leading indicators of labour demand continue to soften. Data on the wage price index (WPI) in the June quarter 2024 also showed a sequential deceleration in wages growth.
  • Yesterday, S&P Global and Judo Bank reported that the Australia composite purchasing managers’ index (PMI) – a leading indicator of GDP – fell to an eight-month low of 49.8 points in September, with overall business activity declining amid a prolonged manufacturing downturn. Importantly, business price pressures eased, with falling input cost inflation enabling firms to raise selling prices at the softest pace since December 2020. The NAB’s August business survey also showed inflationary pressures easing, with final product price and purchase cost growth easing to levels last seen in early 2021.
• Commonwealth Bank (CBA) Group economists continue to forecast the September quarter 2024 trimmed mean CPI to print below the RBA’s expectations, when released on October 30. Alongside a slowdown in economic growth, that could prompt a shift in the RBA’s stance towards policy easing in December 2024.
• Money market traders continue to be more “dovish” than policymakers, pricing a 59% chance of a 25-basis point reduction for December according to LSEG data, though this is down from 64% before today’s decision and 90% in early September.
• With traders expecting the US Federal Reserve to follow-up its jumbo interest rate cut of 50 basis point last week with at least another 50 basis points worth of cuts by year-end, the divergence in rate expectations, continues to underpin the Aussie dollar (AUD).
• During Tuesday’s local session, the AUD rose in response to “dovish” Fedspeak overnight that pushed commodity currencies higher. The Aussie also got support from policy stimulus measures announced by the People’s Bank of China (PBOC) this morning, as detailed below. The measures weakened the Chinese yuan (CNY) slightly in offshore trading. The AUD also lifted from US68.43 cents to US68.68 cents – the highest level since December 28, 2023 – immediately after the RBA’s rate decision at 2.30pm AEST, where it reiterated its hawkish stance.
• Australian bonds climbed in early trading on Tuesday ahead of the RBA’s policy decision. The yield on the rate-sensitive 3-year note fell by 5 basis points to 3.50% in early trade but rose back up to 3.55% after the RBA’s decision before falling back to 3.50% at the time of writing.
• Australian shares edged lower for a second consecutive session on Tuesday, down from Friday’s record high, following a seven-day rally. Interest-rate sensitive financials shed 1.8%, with all the “Big Four” banks trading down. Consumer staples were another weight, down 1.7%, with Coles down 2.6% and Woolworths shedding 2.4%, after the country’s consumer regulator on Monday filed lawsuits accusing the supermarket giants of misleading shoppers about discounts. But miners gained 3.1%, as the Singapore benchmark iron ore prices spiked 4% on Beijing’s stimulus package. Sector heavyweight BHP jumped 3.5%, while Rio Tinto climbed 3.9%. At the time of writing, the benchmark S&P/ASX 200 index was down by 0.04% to near 8,150 points after reaching session highs of 8,172.7 points late in the morning session.
• While today’s RBA decision was expected, it could be a day to remember for China’s monetary policy, with significant policy stimulus measures finally rolled-out.
• The People’s Bank of China (PBOC) unleashed a barrage of measures to shore up the country’s struggling economy this morning, from cuts to interest rates and reserve requirements to making central bank funding available for investors to purchase stocks. Details are as follows:
  • China’s central bank will cut banks’ reserve requirement ratio (RRR) by 50 basis points to 9.5% and further reduced key interest rates to support a recovery in prices, PBOC Governor Pan Gongsheng said on Tuesday. Governor Pan also said the seven-day repo rate will be cut by 0.2 percentage points to 1.5% and deposit and other interest rates will fall as well.
  • Additionally, funds and brokers will now be able to access PBOC funding to buy stocks.
  • Interest rates on existing mortgages will also be reduced by 0.5 percentage point on average and the minimum down-payment ratio will be reduced to 15% from 25% for second-home buyers, with the easing of lending conditions providing some relief to households.
  • Finally, business activity will be encouraged via mergers and acquisitions (M&A) measures.
• Delivering a volley of stimulus measures all at once is highly unusual and possibly speaks to the urgency felt by Beijing policymakers to head-off deflationary risks and get economic (GDP) growth back on track in an attempt to hit this year’s 5% annual target. 
• Chinese stocks rose broadly on Tuesday, and bonds rallied following the announcement, with China’s blue-chip 300 stock index up 3.8%. The 30-year treasury futures for December delivery rose to a record high. China’s yuan (CNY) initially weakened about 0.2% in offshore trading after the PBOC’s announcement but was last trading around 7.0370 per US dollar (USD).

By Ryan Felsman

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Matt Comyn

Commonwealth Bank of Australia (CBA) has announced it has entered into an agreement to sell its Australian general insurance business (CommInsure General Insurance) to the Hollard Group (Hollard), and establish an exclusive 15-year strategic alliance with Hollard for the distribution of home and motor vehicle insurance products to CBA’s retail customers in Australia (the Transaction).

The transaction consideration includes $625 million of upfront consideration, together with deferred payments (payable upon achieving certain business milestones) and additional investment from Hollard throughout the 15-year strategic alliance to drive innovation and enhance the customer experience. CBA will also continue to earn income on the distribution of home and motor insurance products.

A pre-completion dividend is also expected to be received by CBA (amount subject to the timing of completion, business performance and regulatory approvals).

Chief Executive Officer, Matt Comyn, said: “The transaction is consistent with CBA’s strategy to deliver differentiated customer propositions and the best integrated digital experiences. CBA and Hollard will co-invest in innovative, market-leading products and services that anticipate and meet the changing needs of our customers.”

Group Executive Retail Banking Services, Angus Sullivan, said: “This long-term strategic alliance will bring together CBA’s number one mobile banking app and Australia’s largest branch network with Hollard’s innovative insurance products and enhanced claims technology, to deliver excellent experiences for our customers.”

Managing Director for Hollard Holdings Australia, Richard Enthoven, said: “We are incredibly excited by today’s announcement. The synergies between CBA and Hollard extend well beyond strategy and market segmentation. We have a shared vision for the future of home insurance, the potential for better customer outcomes, and an exciting role for digital innovation along our entire value chain.”

CBA financial impacts

Upon completion, the transaction is expected to deliver an increase of approximately $400m of Common Equity Tier 1 (CET1) capital, resulting in a pro forma uplift to the Group’s CET1 ratio of approximately 9 basis points, on an Australian Prudential Regulation Authority (APRA) basis, as at 31 March 2021. The Transaction is estimated to result in a post-tax gain on sale of approximately $90m, which includes estimated post-tax separation and transaction costs of approximately $130m.

Timing and conditions

Completion of the Transaction remains subject to APRA approval and is currently expected to occur in mid-calendar year 2022.

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Ruwanie has been acting in this capacity since the retirement of long-standing CIO, Gerard Parlevliet, in March 2017.

Ruwanie joined Commonwealth Bank Group Super in 2014 as Head of Investment Operations. Prior to joining the Group she was the Director of Investment Operations at WorkCover NSW for eight years, and has previously worked for global consulting firm, Mercer.

Commonwealth Bank Group Super’s CEO, Doug Carmichael, said: “We are pleased to make Ruwanie Dias’ appointment as CIO permanent. She has effectively led the team and earned the respect of the Board since taking on the role from Gerard.  She is a seasoned investment professional with expertise across strategy and operations and over 12 years of experience operating at leadership level.”

Ruwanie and her team will work with the Fund’s investment advisers and the Board to continue to produce sustainable long-term returns to deliver the right outcomes for members.

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Chief Executive Officer, Ian Narev, said, “Since joining CBA as the CFO in 2006, David has been a linchpin of our senior executive team. Due to his strategic breadth, technical skills, and values, he is held in the highest esteem inside and outside CBA. He has made a lasting contribution to CBA, particularly through his leadership of the finance and treasury functions during the global financial crisis and subsequent regulatory change, and his ongoing stewardship of CBA’s long term investments in technology and productivity. We will miss him greatly, and wish him the very best as he moves into a non-executive career.”

Rob Jesudason joined CBA as Head of Strategy in 2011, and since 2014 has led the International Financial Services division, based in Hong Kong.

“We are pleased to appoint Rob following a global search. Rob has more than 20 years’ experience in financial services. He has worked in and alongside financial institutions across the world, and has an acute sense of the rapidly moving economic, regulatory and competitive landscape. He has made a strong contribution over more than five years at CBA, and I look forward to working alongside him in this role,” Ian Narev said.

A successor to Mr Jesudason as Group Executive for International Financial Services will be announced in due course.

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Ms Lewin has more than 25 years international experience in financial services across investment banking, wealth management and private banking. She had a 21 year career at UBS, including as Chief Executive Officer of UBS Wealth Management Australia from 2005 to 2009 and Senior Advisor to UBS from 2009 to 2013.

She is also a Trustee Director for The Australian Catholic Superannuation & Retirement Fund and Chair of the Investment Committee, a Non-Executive Director of the Australian Chamber Orchestra and Kaldor Public Art Projects, a member of the Advisory Council at UNSW Medicine, on the Advisory Finance Committee for the Sisters of Charity, a member of Chief Executive Women (CEW) and an Ambassador for the Australian Indigenous Education Fund (AIEF).

Ms Lewin’s appointment increases the number of independent directors on the Commonwealth Bank Wealth Management Registrable Superannuation Entity (RSE) boards from three to four, and the total number of directors from five to six. Two-thirds of the Colonial First State RSE board members are Independent Directors and two-thirds of the board members are women.

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David Whiteing

Commonwealth Bank welcomes the inaugural cyber security summit hosted by the Prime Minister today which addressed the importance of cyber security in today’s modern economy.

As a long-time advocate for a shared national approach to securing and enhancing Australia’s digital economy, Commonwealth Bank was proud to participate in the summit alongside top business leaders.

Mr David Whiteing, Commonwealth Bank Group Executive of Enterprise Services and Chief Information Officer, welcomed the collaborative approach from Government on this important issue.

“The Prime Minister’s attention to this issue highlights its national importance and we welcome the commitment to strengthening the partnership between Government and the private sector on cyber security,” Mr Whiteing said.

“The summit addressed a number of important themes including improved sharing of information between public and private sector to improve cyber defences, increasing the number of cyber security professionals, and realising the economic opportunity presented by cyber security innovation.

“As more and more business is transacted online, cyber security will continue to be an issue of fundamental national importance. We look forward to continued progress and discussion on this vital issue across business, government, academia, and the broader population,” Mr Whiteing said.

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This second report, which follows Promontory’s initial update published in December 2014, shows more than 22,000 customers have expressed interest in the program, with around 7,000 confirming they would like their advice assessed. Commonwealth Bank has also implemented a nationwide customer contact awareness campaign through the direct mail-out of letters to around 350,000 households as well as ongoing marketing of the program through national media and targeted community engagement.

The report focuses on the pilot program which was designed by CBA to test the adequacy and robustness of processes that will be used for all customers participating in the program. The Open Advice Review program has now moved to its next stage of reviews.

Promontory was appointed as the Independent Expert for the Open Advice Review program and as such will review the program’s processes with periodic reports on the program’s outcomes. Its initial report assessed the program’s build-phase, and provided an overview of its structure and independent processes. The next report will be released in September 2015.

Promontory Financial Group’s second report can be viewed on Commonwealth Bank’s website.

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Marianne Perkovic

Commonwealth Bank has announced new minimum education standards for Commonwealth Financial Planning Limited (CFP) financial planners, supervisors and managers of planners.

Since 2011 the Bank has transformed the CFP business. There have been changes in management, structure and culture. We have also invested in new systems, implemented new processes, enhanced adviser supervision and improved training. These new standards are an important step in increasing the educational and professional standards of our financial planners, and exceed current industry requirements.

The new education standards include:

• All new CFP financial planners, recruited from today, must hold a degree in finance, business, commerce or a related field;
• All new CFP direct supervisors or managers, recruited from today, must hold a degree in finance, business, commerce or a related field;
• Existing financial planners authorised under the CFP licence and their supervisors will be required to hold either an Advanced Diploma in Financial Planning (or equivalent) or a degree in finance, business, commerce or a related field by 30 June 2017;
• Existing Senior Financial Planners will be required to obtain the CERTIFIED FINANCIAL PLANNER® certification with the Financial Planning Association of Australia; and
• CFP commits to making membership of a relevant financial services industry association a minimum standard required of all CFP financial planners by 30 June 2015.

Executive General Manager Advice, Marianne Perkovic said both the Interim Report of the Financial System Inquiry and the Final Report of the Senate Economics Committee inquiry into ASIC concluded that educational levels across the industry need to be enhanced. Last Friday’s announcement is an important and proactive step to meeting the standards envisaged by those reports.

“The relationship between a financial planner and their customers must be based on trust. The significant transformation in this business since 2011 has been all about building that trust. This is an important next step that continues our investment in the professionalism of the advice industry.”

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We know this is unacceptable and I unreservedly apologise to all customers affected. Poor advice
provided by some of our advisers between 2003 to 2012 caused financial loss and distress and I am
truly sorry for that.

Today we are announcing our Open Advice Review program. This is a new, far reaching program of
review and remediation with independent oversight, to deliver fair and consistent outcomes for
customers of CFP and FWL. This program demonstrates our commitment to make it right for our
customers.

At no cost to customers, the program will provide an assessment of the advice received, access to an
independent customer advocate and an independent review panel. The program will be fully
transparent to customers. To ensure we reach as many customers as possible there will be an
extensive national advertising campaign.

Before providing further details of the program, I’d like to make some more general comments.

The events considered by the Senate Committee occurred during the Global Financial Crisis, at a
time when most people, even when well advised, were losing money on their investments. The matter
of how to compensate affected customers was complicated. Our principle was to put customers back
in the position they would have been had they received suitable advice. We have already paid $52
million in compensation to more than 1,100 customers of specific advisers who were identified as
having provided poor advice.

We have transformed our CFP and FWL businesses, so that today they can perform the critical role of
providing quality and affordable financial advice to our customers. There have been changes in
management, structure and culture. We have also invested in new systems, implemented new
processes, enhanced adviser supervision and improved training.

However, I acknowledge there are views among some customers, and indeed in the Senate report
released last week, that our approach has not been sufficient for all our customers. We have listened
carefully and this program is a direct response to those concerns.

Open Advice Review program

The key features of the new program will be:

• Any customer who received advice from CFP and FWL between 1 September 2003 and 1
  July 2012 and has concerns regarding that advice will be able to call a dedicated number and
  request an assessment of any advice received in the review period;
• The review of the past advice will be conducted by a specialist Commonwealth Bank team;
  In conducting a review, the specialist team will share the information it has available with the customer and will invite the customer to provide information that the customer has available;
• Once the review is complete the customer will receive an assessment and the offer of an independent customer advocate funded by the Commonwealth Bank;
• A customer who does not agree or is concerned with the assessment will have the option of a further review by an independent panel, determining whether compensation is payable and, if so, how much;
• The Commonwealth Bank will be bound by the outcome of the panel’s determination. However, the customer will not be bound and will still have the option of taking the matter to the Financial Ombudsman Service or pursuing a claim in respect of the matter; and
• We will also have the process overseen by an independent expert who will make their periodic reports public.

The comprehensive nature of this Open Advice Review program demonstrates our commitment to delivering a fair and consistent outcome for customers. This program is in addition to the licence conditions previously announced by the Commonwealth Bank and the Australian Securities and Investments Commission.

In order to improve public confidence in the broader financial planning industry, we will advocate for improved adviser education and training, transparency in adviser quality such as the public adviser register and measures that improve the financial literacy of customers.

The way in which we have transformed our CFP and FWL businesses over the past three years shows our commitment to ensuring that the best interests of our customers are always our first and foremost consideration. This transformation brings CFP and FWL in line with our other businesses at the Commonwealth Bank.

I also want to acknowledge that there are 50,000 people who take pride in working for the Commonwealth Bank who also have felt let down by these events. Their focus on customers over many years has delivered excellent outcomes for over 10 million customers, the 800,000 Australian households who own our shares directly and the millions more who own them through their retirement funds, and the broader community around us.

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