By Eva Cheng
In 1993, finance minister (now treasurer) Ralph Willis publicly assured us that the federal government has "no intention whatever" of reducing its ownership of the Commonwealth Bank to less than 50.1%.
The statement was made when the federal government was trying to sell another 30% of its shareholding in the bank, after selling 19.9% in 1991. But in the budget speech on May 9, Willis revealed that the government was going to sell the entire CBA because it had "changed" its mind.
The whole episode gives a good measure of how much we can trust the word of this government.
In fact, it would be easy to regard the latest move as the continuation of a carefully orchestrated manoeuvre to deprive the public of an institution which was set up for them and nourished by their deposits. Now that the bank is bringing in good income, the government plans to sell it. The potential buyers are concerned only to maximise profits, even at the expense of customers and employees.
The consequences of this drive for profit have become evident since the first sell-off in 1991.
In the three-and-a-half years since then, the bank has cut 12,861 jobs (or 26.6% of the staff) to 35,406 and closed some 200 branches. This year, it introduced a charge of $2 per month and fees for all transactions — including those through tellers or ATMs — on accounts with a monthly balance of less than $500.
These changes were made not because the bank was losing money, but because it wanted to further increase profits. In the six months to December 1994, the bank made $454.5 million, up 45.5% from the previous year.
The bank claims that the frequent transactions on low-balance accounts make them "too costly" compared to the allegedly meagre income generated from them. However, it has not revealed the details of costs, nor how such costs are apportioned within the overall banking operation.
The bank has introduced an apartheid banking system, discriminating between customers on the basis of their financial strength. Nearly everyone, in our increasingly "cashless" society, needs access to a bank. Federal government benefits, for example, are paid only into bank accounts.
But if you bring in too little money or have stopped bringing in enough, say when you retire, in the bank's judgment you should have to pay a fine.
The lowest income groups are being hit the hardest, and privatisation of the bank will make the situation worse for them. Research produced by the Department of Social Security, and confirmed by the bank, reveals that 83% of the bank's customer base are low-income accounts.
The myth that lower-income accounts are a cost drag is widespread. In fact, these accounts are part of the retail deposit base from which the most lucrative income has been generated.
Banks pay depositors much less than what they charge borrowers. Commonwealth's passbook accounts, for example, are currently paid an annual interest of 1.25% for a balance of less than $5000 and 2% for balances up to $19,999. But it is charging home owners between 8.2% and 10.75% for mortgage loans, pocketing a difference of between 6.2% and 9.5%. CBA is the bigger home loan lender in Australia, holding 22.48% of the market.
The Commonwealth, like all other banks, pays the bigger and longer-term depositors more while charging the bigger business loans less. Even so, the bank's overall domestic interest margin was, as of December, a high 3.94%.
Cheap funding is crucial to a bank's profitability, and small accounts have served the Commonwealth Bank well on this score. Of every dollar loaned by the bank, 70 cents is provided by these generally cheap retail deposits. The bank knows this, as managing director David Murray conceded last December after the bank far exceeded market expectations in registering a 45.5% jump in profits.
Murray said profits had been helped by the bank's substantial pool of "relatively interest insensitive" deposits, which were particularly lucrative at a time of rising interest rates. This is because all the banks are quick to raise charges on borrowers (because most contracts are tied to market levels), but are slow in passing on higher rates to depositors, in particular those holding longer maturity and small accounts.
CBA holds a substantial 20% of Australia's deposits, a position unlikely to be achieved in the absence of the government's guarantee for all its deposits. Other banks do not enjoy such benefits.
Despite all the bank's privileges, those least able to pay are being charged more. About $40 million a year is expected to be generated from fees.
The Commonwealth Bank was set up in 1912 supposedly to give the public an alternative to the profit-driven private banks. Ben Chifley, a member of the Royal Commission on Banking in the 1930s, was recorded in the authorised history of the bank as saying that banks might occasionally respond to the public interest, but in the long run, their aim was to make profits.
Chifley continued: "Banking enters too vitally into every phase of community life for its activities to be left to the dictation of profits or of prestige which would lead to future profits".
That's still true, though the Labor Party no longer pretends to believe it.