University of Wollongong Thesis Collections University of Wollongong Thesis Collection University of Wollongong Year 2001 An empirical study of international correspondent banking in Australia Soon-Lim Chan University of Wollongong Chan, Soon-Lim, An empirical study of international correspondent banking in Aus- tralia, Doctor of Philosophy thesis, Department of Marketing, University of Wollongong, 2001. http://ro.uow.edu.au/theses/1476 This paper is posted at Research Online. Chapter Six i06 CHAPTER SIX: CASE STUDY: CORRRESPONDENT BANKING IN COMMONWEALTH BANK OF AUSTRALIA (CBA) 6.0 INTRODUCTION This is the first component of the three components'core research. This case study is based on rigorous interviews with a group of CBA's senior bank staff including Gavin E J Forte, General Manager, CBA's Institutional Banking; Stephan Symydzuk, Senior Manager, CBA's Technology and Operations; Robert Buchan, Senior Manager, CBA's Risk Management; Keith McDougalI, Senior Manager, Global Payment Services; Paul McMartin, Assistant Manager Exports, International Trade Processing Centre; and Roland Condell, Manager, CBA's Business Banking Centre, Toowoomba. The case is presented in two parts. The first part (section 6.1) sets out CBA's background, history and development, the organisational sfructure, in particular the institutional banking, rationalisation and current development and performance of CBA. The second part is concenfrated on the study of CBA's correspondent banking in section 6.2. CBA's defmition and management of corbanking will be discussed in paragraph 6.2.1, the organisation of CBA's corbanking in paragraph 6.2.2, the purchasmg management of intemational corbanking services and reasons for using corbanking in paragraph 6.2.3, selection criteria of CBA's correspondents and thefr classification corbanking relationships in paragraph 6.2.4, risk management in sub-section 6.2.5, relationships management in paragraph 6.2.6, strategies of development of CBA's corbanking business in paragraph 6.2.7, ftiture of CBA's corbanking in paragraph 6.2.8. The conclusion is in section 6.3. Chapter Six 107 6.1 BACKGROUND OF THE CBA CASE STUDY The Commonwealth Bank of Ausfralia is one of the four major banks in Ausfralia. The bank's operations are conducted predominantly in Australia. It has headquartered in Sydney, Australia. The CBA is Australia' largest bank in terms of housing loans and retail deposits and is the second largest in terms of Ausfralian assets, but its global asset is the smallest among the big four. The Bank obtains a large proportion, 68%, of its ftmds from domestic retail sources (term, demand and non-interest bearing deposits). At June 30, 1997, the Bank had, on a consolidated basis, aggregated approximately A$60 biUion, or 22.4% of domestic deposits, with loans outstanding of A$82 billion. The CBA, together with its subsidiaries, provides a wide range of banking, financial and related services with its staff of approximately 37,000 through a network of 1,612 branches throughout Australia. CBA had Australia's largest branch network. In addition to a number of overseas branches, the bank has a 75%) stake in the New-Zealand-based ASB Bank Ltd. During June 1997, CBA announced a joint venture with Bank Interaational hidonesia (BII). CBA operates interaationally through its branches in London, New York, Grand Cayman, Singapore, Hong Kong and Tokyo, as well as through subsidiaries in Papua New Guinea, New Zealand, Solomon Islands, and Indonesia. Representative offices in Hanoi, Beijing, Shanghai and Jakarta are also established. CBA has interaational correspondents in major cities of the world. ft also provides interaational corbanking services to fmancial institutions onshore and offshore of Australia, in particular Australian dollar services. CBA's principal correspondents are ASB bank in Auckland, Deustsche Bank in Frankftirt, Bca Comle Italiana in Milan, Credit Lyonnais in Paris, Bank of Montreal in Toronto and Union Bank of Switzerland in Chapter Six 108_ Zurich. Domestically, CBA has provided corbanking services to foreign banks and currently is marketing its corbanking services to the regional banks and non-bank financial institutíons. Branches, subsidiaries, joint venture in Indonesia, representative offices and intemational corbanks form world-wide banking network for CBA. Recent merger between the Colonial Ltd with CBA on July 2000 involves increase of the bank size and Chinese regulators have approved to launch a joint-venture between Colonial Ltd and China Life which expansion of insurance business and international fmancial services in China. Both wiU have positive impact over CBA's corbanking business. Chapter Six 109 6.1.1 Organisation Structure and Business of CBA The organisation stracture of CBA's group is exhibited in Figure 6.1: Figure 6.1 Commonwealth Bank of Australia's Group Structure Please see print copy for image Source: CBA's Annual Report 1996. Notes: Boxes drawn by thicker lines are the functional units of CBA. The heads of each and every flinctional unit represents in the Executive Committee of CBA. Intemational corbanking is under the fiinction of Institution Banking. Chapter Six HQ CBA provides comprehensive domestic and international banking services, which fulfil basic needs for respondent banks overseas or within the country. The bank's business mainly comprises: (l)Personal Banking. It provides a fiill range of retaU banking products and services, including cheque and savings accounts, demand and term deposits, credit card services, personal and housing loans (2)CBA Financial Services (CBAFS). It is Manager and distributor of superannuatíon, investment and life insurance products for individual and commercial customers. In addition, CBAFS manages ftmds on behalf of wholesale or other institution clients, with investment service managers providing a personalised level of service (3)Business Banking. Provides banking services to the Bank's business customers, other than those with turaover in excess of $75 miUion (4)histitutionaI Banking. Correspondent Banking is one of the business portfolios of this functíonal unit. Details of the business will be discussed under paragraph 6.1.4 on Institutional Banking. (5) Commonwealth Development Bank. It provides finance to small businesses including primary producers. (6) ASB Bank Limited. Its operatíons provide personal, business and mral banking services through a New Zealand wide network of 123 branches, as well as selected corporate banking services. 6.1.2 Institutional Banking Chapter Six 111 The histitutional Banking ( B), in figure 6.2 a senior functional unit, directiy reports to The Managing Director of the CBA. The IB is a highly specialised division of the CBA whose objectives are: (i) To service the needs of large corporate clients, both within Australia and offshore. These clients include many of Austtalia's large companies, overseas corporations and govemment authorities including financial institutions both onshore and offshore; and (ii) To service the needs of the Bank's retail and business banking networks. This includes providing products from the money market and services for importers and exporters. The IB comprises of five separate business units: financial markets, banking services (Marketing), corporate finance, risk management, technology and support. Figure 6.2 Organisation of Institutional Banking Please see print copy for image Source: "Which provides high performance for institutionai clients," a CBA pamphlet. 6.1.3 Performance of CBA 6.1.3.1 Summary of CBA performance (1) Underlying Performance. The bank's underlying performance in dollars declined slightly over the period 1991-1994 but improved signifícantly over the last twenty months. The key drivers of this improvement of performance have been an increase in net interest earaings ($2,844million in 1994, $3,164milIion in 1995 and $3,397milIion in 1996) and a stable cost base. However, the level of net interest eamings has been affected Chapter Six 122 by a combination effect of a number of interacting influences including: growth in interest earaing assets; movements in market interest rates; the extent of competition m home lending and commercial lending markets; the level of impaired assets and extent of interest foregone; increases in net interest eaming assets; the savings pattems of retail customers; and external influences such as regulatory or budgetary intervention. (2) Efficiency Ratio. Since 1992, the Bank has improved its efficiency ratio operating expenses to assets, by keeping operating costs stable whilst increasing the asset base and net interest earnings. During the year ended June 30, 1993, a restmcturing provision of $188 million was established and was ftilly utilised through a number of re-engineering programmes in the two years to June 30, 1995 (Phase I). As a result of this reorganisation, staff expenses declined in the period up to June 30, 1995, primarily through a reduction in head count. However, industrial relations problems settled by an enterprise bargaining agreement increased staff expenses in the second half of 1996. (3) Non-hiterest Income. The Bank's Non-Interest Income as shown in the Table 6.1 is from a number of sources. In particular, significant income is generated from fees and commissions. Within the period June 1992 to June 1996, non-interest income has remained relatively and surprisingly stable [at approximately $1.4 billion] for a modem bank. Chapter Six 113 TABLE 6.1 NON-INTERESTINCOME 1992-1996($MILLION) Please see