The People’s Bank and Privatisation


Bank of Bob

My first reaction to the news that the Commonwealth Bank had made a $9.67 billion profit was a typical champagne socialist rant.

What social justice reforms could we achieve with that kind of money? I fumed (something non-smokers rarely do). For perspective, CommBank’s profit is more than double the $4 billion allocated to the Federal Media, Arts and Sporting industries in the March budget.

It’s also twice the amount the Federal Government allocated to affordable housing in the same Budget. What I’m implying by these comparisons will matter not a jot to most of CommBank’s 800,000 shareholders. They are the ones who benefit most from the bank’s 4% dividend and its unrelenting capital growth.

If you’d accumulated 10,000 shares in the 1990s you’d be a millionaire now on that shareholding alone.

Almost all fund managers and investment advisers will tell you everyone should have at least one and preferably two major banks in their portfolios. Generous franked dividends, seemingly endless capital growth and ‘government-guaranteed-too-big-to-fail status’: reasons enough for most. All of the banks indulge in risky derivatives and hedge fund trading and support organisations that ethical investors avoid (mining, oil and gas, alcohol, tobacco, arms, gambling to name a few). But there’s no law against it.

Let’s climb into the DeLorean then and return not to the future but the past – 1991, an era that gave us “the recession we had to have and which ushered in a cavalcade of high-profile privatisations. Great Scott, Marty!

The Hawke/Keating Labor governments decided to offer government-owned institutions to the private investment market. CommBank, Telstra, the Commonwealth Serum Laboratory (CSL) and what we now know as Australia Post were among the biggest. At the time, the Commonwealth Bank was listed on the Australian share market and those who got in on the public float bought shares at an issue price of $5.40.

Last time I looked, CBA shares were trading at $100 and they have been as high as $110 in the past 12 months. The most recent dividend was $2.10, a yield of 4%, fully franked, which means investors get a tax rebate.

CommBank’s website offers a large slice of the institution’s history, from establishment in 1912 to present day. It’s a big number to get your head around, but what was once the People’s Bank has a market capitalisation of $172.64 billion. It employs 52,000 people.

Like all four of major banks (and some smaller ones) CommBank has not escaped scandal and opprobrium.

The Hayne Royal Commission into the banking sector in 2017 found widespread failures of governance and compliance in banks and other financial institutions. These lapses led to failures to detect and address misconduct, failures to report misconduct to the regulators in a timely manner, or even failing to report it at all.

Last year CommBank exited the discredited financial advice business, a sector which attracted a lot of the criticism within the banking inquiry.

The Australian Financial Review’s ‘wealth editor’ Alek Vicovich reported in October 2021 that CBA was closing down the last of its financial advice operations. CBA had previously operated its own financial planning subsidiary, Commonwealth Financial Planning, which employed full-time advisory and call centre staff. Other banks operated under the ‘dealer group’ model, which meant licensing self-employed companies to give advice. .

During the financial scandal-plagued 1980s, CommBank, like many others, lent money to entrepreneurs it should have been keeping a better eye on. As is always the case, large losses from bad loans are ‘written down’ and disappear forever from the balance sheet. Investigative financial journalist Michael West has written reams on the banking sector if you want to go down that particular rabbit hole.

The curious thing about a bank is that in its raw form it is simply a vault where customers keep their money. In the pre-privatisation era, the bank paid its customers interest on the money it safeguarded for them. Not a generous amount, mind you, but enough for generations to learn the value of thrift and establish savings habits. Then came privatisation. The bank still paid interest (as it also charged interest to customers who borrowed money to buy a house or build a business). Along the way (the Reserve Bank started keeping track of it in 1997), banks started charging a fee for service. In 2021 the total fees charged to household customers by all banks exceeded $1 billion.

As the RBA says, privatisation in Australia started in earnest with the sale of the first tranche of the Commonwealth Bank in 1991.

“The factor supporting its privatisation was the newly introduced capital adequacy guidelines for the banking industry. These meant that expansion by the bank would require increases in its equity base, which in turn would probably involve continuing calls on the Commonwealth budget.

Public Trading Enterprises (PTEs), have been sold at both the State and Federal levels of Government in Australia. Sales since 1990 of former Commonwealth assets totalled about $30 billion (including the first stage of the Telstra privatisation). State Government sell-offs raised a similar amount.

It’s a bit bewildering when you consider that this rampant capitalism was ushered in by a Federal Labor government and was oft-repeated at a State level, by Labor and Tory-led governments alike.

The market success of the Commonwealth Bank was replicated and then outdone by the public sale of the Commonwealth Serum Laboratory. In 2020, economist and prolific blogger Professor John Quiggin aired the latest instalment of what he calls “The strange case of CSL – paying for what we used to own”.

Prof Quiggin makes the point that the Federal Government was about to shell out more than $1 billion to a company it used to own. The deal with a CSL subsidiary, Seqeris, involved building a new vaccine manufacturing plant in Melbourne to produce vaccines for influenza and Q Fever, as well as anti-venenes for snake and spider bites. (It would have been kind of handy to have a government entity researching a vaccine for Covid, wouldn’t it? Ed.)

When the Keating Government privatised Commonwealth Serum Laboratories in 1994, the share price of $2.30 was a ‘spectacular bargain’, Prof Quiggin wrote. Investors got their money back 500 times over. That beat even the Commonwealth Bank float, where investors got about 50 times their money back.

The reason the price was so low was, in part, that CSL was not a household name. Prof Quiggin and Independent Australia colleague Clive Hamilton investigated this float, concluding it was “one of the worst privatisations entered into by the government.

Socialist rhetoric aside (not that it’s a bad thing), those who bought CSL shares at $2.30 and acquired more as the price improved are now sitting on a pharmaceutical gold mine. The shares are currently worth $295 and earlier this year almost cracked $320. CSL pays a paltry dividend (0.90% yield) but I doubt it would bother anyone who bought 2000 CSL shares at $2.30 (now worth about $220,000).

There you have it, dear reader, a brief time travel experience back to the heady days of privatisations, done so governments could reduce debt and avoid future financial liability.

I clearly recall banking sixpence a week (half my pocket money), clutching my passbook as if it was a passport to the future. Maybe you had one too.

Disclaimer: The author is a customer of on-line broker Commsec, a CommBank subsidiary, from which a lot of the research was derived.




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