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Commonwealth Banks Restructuring Bill 1990



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House: House of Representatives

Portfolio: Treasury

Purpose

To convert into public companies the Commonwealth Bank of Australia, with the Commonwealth to retain 70% ownership and control, and the Commonwealth Development Bank of Australia. The Bill will also provide for the acquisition of the business of the State Bank of Victoria.

Background

The Commonwealth Bank Group comprises the Commonwealth Bank of Australia and subsidiaries, the Commonwealth Savings Bank of Australia and the Commonwealth Development Bank of Australia. In 1989-90, the Commonwealth Bank Group recorded an after tax profit of $494.2 million and a return on equity of 13.21%, compared with 14.63% for 1988-89 1. Total assets of the Group grew by 10.5% to $67.030 billion, compared with $60.650 billion in 1988-89 2. In 1989-90, the Group returned a dividend to the Commonwealth of $160.1 million, compared with a dividend of $110.0 million in 1988-89 3. In 1989-90, the Group paid income tax totalling $289.5 million, compared with $389.7 million in 1988-89 4. The Groups bad debts expense rose from $298 million in 1988-89 to $461 million (which includes write-offs of $363.2 million) in 1989-90 5. Retail deposits grew by $3.5 billion to $28.3 billion, a growth of 14.3% compared with 4.6% in 1988-89, and $4 billion was lent for owner-occupied housing, compared with $3.6 billion in 1988-89 6. Table 1, below, provides a comparison between Commonwealth Bank and major private bank returns on average equity and returns on average assets.

Table 1: 7

Return on average equity: Commonwealth Bank Group Major Private Banks 1986 14.13% 13.07% 1987 8.46% 10.57% 1988 10.01% 13.29% 1989 14.63% 13.87% Return on average assets: 1986 0.77% 0.76% 1987 0.47% 0.60% 1988 0.58% 0.83% 1989 0.86% 0.87%

The measures in this Bill relating to the acquisition of the business of the State Bank of Victoria (SBV) and the conversion of the Commonwealth Bank of Australia (CBA) into a public company have their origins in the failure of Tricontinental, a merchant bank subsidiary of the SBV. Serious problems with the SBV became apparent in late February 1990, when the Victorian government took responsibility for $800 million in SBV losses arising from the failure of Tricontinental. Further pressure on the SBV arose from the failure of the Farrow Group building societies in July. The SBV made a $360 million payment to unsecured Farrow depositors which was secured only with a State government promise, not by Farrow assets (note: on 26 August the Victorian Premier revealed that the SBV had found additional debts requiring a Government support package of $2.7 billion). A

Commonwealth Banks Restructuring Bill 1990

chronology of the major events leading to the announcement of the sale of the SBV to the CBA by the Premier of Victoria and the Treasurer on the 26 August 1990 is contained in an article titled `Countdown to the big deal' in the Financial Review of 29 August 1990.

In a joint press release of 26 August 1990, the Premier of Victoria and the Treasurer publicly announced the sale of the SBV and outlined the components of the sale package. The sales package comprised: a purchase bid of $1.6 billion by the CBA for the SBV; $170 million to eliminate tax loss write-offs from Tricontinental; a $243 million reimbursement to Victoria for taxation revenue which in future will go to the Commonwealth rather than the State government; the separation of Tricontinental from the SBV; that Tricontinental assets including tax losses not being sold will not be used to reduce Commonwealth Government tax receipts; and that the Victorian Government not revoke any existing or future indemnities to be given in respect of the assets of that part of the SBV Group that is being sold.

On 28 August 1990, the Federal Parliamentary Caucus of the ALP issued a press release announcing that it endorsed the action of the Cabinet (note: on 23 August Cabinet decided that the only basis on which the CBA could make a bid for the SBV was if it was financed by a sale of equity in the CBA) approving the merger of the CBA and the SBV and the merger being funded by a sale of equity in the CBA. In doing so, the Caucus also endorsed the imposition of certain conditions on the introduction of private equity in the CBA including:

*that the Government introduce legislation requiring majority government ownership and control of the CBA in perpetuity (note: this condition could only be met if the Constitution was amended, or if the Government were returned to office in perpetuity as future governments may amend the legislation);

*that the sale of equity in the combined CBA/SBV group be restricted to $1600 million (30% of issued capital);

*that other banks, including foreign banks, not be allowed to acquire shares in the CBA;

*individual shareholdings should be limited to 5%; and

*an employee share owning scheme be established.

The stated reasons given by the Government for the CBA/SBV merger and financing of the merger by the sale of equity in the CBA include: that the financial position of the SBV threatened the stability of the Australian financial system; that the CBA cannot finance the acquisition of the SBV from its existing capital base; and that the Commonwealth is not in a position to augment the CBA's capital base from the Budget 8.

The stated position of the Liberal-National Parties to the CBA/SBV merger and funding of the merger by a sale of equity in the CBA has been, in large part, to welcome the Government's decision but signal that, when elected to Government, they will legislate to allow 100% private ownership of the CBA. Stated reasons given by the Liberal-National Parties for advocating 100% private ownership of the CBA include: public flotation of the Bank is more egalitarian and gives shares to all Australians 9; it will improve the efficiency of the CBA, boost the CBA's productivity, and provide the CBA with access to capital 10.

The stated position of the Australian Democrats to the CBA/SBV merger and funding of the acquisition by a sale of equity in the CBA has been to support the merger but reject the sale. Stated reasons given for rejecting any sale of equity in the CBA include: that the CBA must remain in the hands of the community to ensure that it can be used as a leader in implementing Government policy; the community should not give up its avenue of keeping the private enterprise banks honest; funds for acquiring the State Bank could come out of the Budget surplus, particularly since it is not recurrent expenditure but the purchase of an asset; and that it would dilute the public's shareholding, forfeit future revenue and open the door for total privatisation 11.

The acquisition of the SBV by the CBA is likely to have a number of effects on the position of the CBA in the banking market, including that the CBA may become the dominant player in the banking market, holding one dollar in every four deposited with a market share of approximately 21%. In Victoria, the CBA will control 33% of the market, with a branch network of approximately 800 outlets. Also, the merged CBA/SBV will be the dominant operator of superannuation rollover funds, with more than $2.5 billion of deferred retirement benefits under management, representing approximately one in every seven dollars in the business 12.

Main Provisions

Amendments to the Commonwealth Banks Act 1959

The Treasurer may make the Secretary to the Department of the Treasury a member of the Board of the CBA, with the function, in addition to those held as a Director, of representing the views of the Treasurer (clause 12).

New sections 27A-27L will be inserted into the Act by clauses 21 and 22 and deal with the conversion of the CBA into a public company, the share capital of the CBA, and restrictions on the issue and transfer of shares in the CBA. The share capital of the CBA is to consist of $2 shares and there may be different classes of shares with different rights attached to different classes (proposed section 27A). The CBA is to convert its capital into shares, and the shares are to be issued to the Commonwealth (proposed section 27B). The CBA is to apply to be registered as a company (proposed section 27C), and will be taken to be registered under the Companies Act 1981 by virtue of proposed section 27D.

Proposed section 27K provides that it will be an offence for a person to apply for the issue of shares in the CBA to any foreign person. The maximum penalty which may be imposed for a breach of this provision will be a fine of $50 000. With the consent of the prosecutor and the defendant, an offence may be heard and decided in a Magistrates Court. Where this occurs, the maximum penalty which may be imposed for an offence under proposed section 27K will be a fine of $10 000. In proceedings for an offence, it will be a defence if the defendant proves that they were not aware and could not have been reasonably expected to be aware that they were applying for the issue of shares in the CBA to a foreigner. No offence will have been committed where an application for shares in the CBA is made by a trustee or manager of a fund in which foreign interests represent 40% or less of the total interests of the fund. Proceedings for an offence will only be able to be brought with the consent of the Treasurer.

The Commonwealth is not to transfer any of its shares in the Commonwealth bank and neither the Commonwealth or the CBA are to do anything that results in the Commonwealth no longer holding and controlling 70% of the shares of the CBA (proposed section 27L).

Clause 28 provides that before making a recommendation for the payment of a dividend, if any, to CBA shareholders, the Board of the CBA is to notify the Treasurer of the recommendation. The Treasurer, within 2 weeks of being notified of the recommendation is to either accept the recommendation, or vary the recommendation by specifying a dividend that does not exceed 45% of the consolidated profit of the CBA and its subsidiaries. Before varying a recommendation of the Board, the Treasurer is to try to reach agreement with the Board and is to take into consideration the reasons for the Boards recommendation. The CBA, in general meeting, will not be able to declare a dividend greater than that recommended by the Board.

The share capital of the DBA is to consist of $1 shares. The DBA is to convert its capital into shares and the shares are to be issued to the CBA. A person other than the CBA will not be capable of holding, or having an interest in, the share capital of the DBA (clause 36).

The Board of the CBA may direct the DBA to pay a dividend to the CBA, or credit the CBA Reserve Fund, a specified amount from the annual net profits of the DBA (clause 39).

Clause 64 provides that CBA staff will continue to be employed by the new body on the same terms and conditions.

Clause 67 provides that the CBA will become the successor in law of the SBV and that all property and liabilities of the SBV will become those of the CBA.

Clause 69 provides that the branches of the SBV will become branches of the CBA.

Clause 72 provides that SBV staff will continue to be employed by the CBA on the same terms and conditions.

Clause 74 authorises the Treasurer to pay Victoria $413 million for the purpose of giving effect to an agreement between the Commonwealth and Victoria relating to the acquisition of the SBV by the CBA, and appropriates the necessary funds from the Consolidated Revenue Fund.

Amendments to the Banks (Shareholdings) Act 1972

A new section 10A will be inserted into the Act by the Schedule to the Bill. Proposed section 10A provides that it will be an offence for a banking entity (`banking identity' is defined to include a bank, or any person who carries on banking business inside or outside Australia, other than the CBA, the Commonwealth Savings Bank of Australia, the DBA, or a subsidiary of the CBA) to have an interest in any shares of the CBA. No offence will have been committed by a banking entity for holding an interest in the CBA if the reason for having the interest is because they or their associate are trustee's or manager's of a fund. It will also be an offence for a person to have an interest in the CBA exceeding 5% of CBA shares. The maximum penalty which may be imposed for a breach of these provisions will be, in the case of an individual, a fine of $10 000, or in the case of a corporation, a fine of $50 000.

Remarks

This note addresses the economic (not political) implications of the Government decision to finance the merger of the CBA and SBV by a sale of equity in the CBA.

* Effect on PSBR: Sale of equity in the CBA would not affect the public sector borrowing requirement (PSBR) directly since, for statistical purposes, government financial enterprises are excluded from the public sector (see Budget Paper No. 1, page 6.2, Note 1, for an explanation).

* Effect on Commonwealth Revenue: By selling off 30% of the CBA, the Commonwealth will lose 30% of the dividends it would otherwise receive. Offsetting this will be dividends received from the merged SBV. Assuming the Commonwealth bank shares are sold at prices reflecting their true returns there should be no net loss of dividend revenue to the Commonwealth in the long term.

* Benefits of equity financing: The reputation of the CBA as a safe investment may enable it to sell shares at a premium.

Equity finance is more appropriate for longer term or risky investments that do not yield immediate cash flows that can be used for interest repayments, since dividends on equity are only paid out of profits. While the SBV's assets clearly have a significant net cash flow, there is some risk that the merger may discourage depositors who prefer a `local' bank (note: Westpac experienced such problems in a past merger).

References

1. Commonwealth Banking Group, Annual Report 1990, pp. 1 and 2.

2. Ibid.

3. Ibid.

4. Ibid.

5. Ibid., at p. 12.

6. Ibid., at p. 14.

7. Ibid., at p. 4.

8. Treasurer, Press Release, 26 August 1990.

9. John Moore, News Release, 29 August 1990.

10. House of Representatives, Daily Hansard, 14 November 1990.

11. Senator Sid Spindler, Media Release, 24 August 1990; and

Senator Vicki Bourne, News Release, 5 September 1990.

12. Financial Review, 27 August 1990.

Bills Digest Service 20 November 1990

Parliamentary Research Service

For further information, if required, contact the Economics and Commerce Group on 06 2772465.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Commonwealth of Australia 1990

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Published by the Department of the Parliamentary Library, 1990.