Commonwealth Bank annual cash profit slips 4.8pc to $9.23bn

CBA’s CEO says house price falls are good for financial stability, after the bank posted its first profit fall since the GFC.

Matt Comyn says the bank’s fundamentals remain strong. Pic: James Croucher

The recent fall in housing prices is a “good thing” for financial stability, says Commonwealth Bank boss Matt Comyn.

Commenting on moderate price falls in the key Sydney and Melbourne markets, the CBA chief said affordability had become an issue due to the long boom in prices.

Pockets of mortgage stress were also emerging in Western Australia and the Northern Territory.

“Where price growth moderates, it’s a good thing for financial stability,” Mr Comyn said.

His comments come after CBA posted its first profit fall since the financial crisis, and as the pay packets of senior executives including former boss Ian Narev shrank due to a series of disasters.

Releasing its annual results this morning, CBA said it cash profit retreated 4.8 per cent to $9.23 billion for the June financial year.

Net profit declined by 6 per cent to $9.33bn, from a record $9.93 billion the year before.

It is the first weakening of earnings since the height of GFC, breaking growth that has averaged more than 8 per cent.

CBA (CBA) shares were up $1.06, or 1.4 per cent, to $73.95 at 10.52am (AEST).

On top of the previously announced $700 million settlement with Austrac over money-laundering transgressions, there was an additional $389m in provisions, including an extra $234m set aside for risk and compliance.

CBA also booked one-off regulatory costs of $155m.

The provisions related to financial crimes compliance, an ASIC investigation, shareholder class actions, the Austrac proceedings, the financial services royal commission, and the APRA prudential inquiry into CBA’s culture and governance.

Mr Comyn said it has been a “difficult” 12 months, but the bank’s business fundamentals remained strong.

“We got some things wrong. We have made mistakes,” Mr Comyn said in a statement. “We absolutely need to make sure we do not make them again.”

But despite the gloom, the fundamentals of the business remained strong, he said.

“Operating momentum was driven by our core franchise, which delivered good volume margin management in home and business lending, ongoing growth in transaction accounts and deposits, and continued uptake of our technology offering,” Mr Comyn said.

“We also continued to strengthen our balance sheet.”

The solid operating performance, he said, had enabled CBA to declare a higher annual dividend, up 2c to $4.31.

It has been a turbulent year for Australia’s largest bank by market value and its biggest mortgage provider, as it ushered in a new chief executive and executive team, refreshed its board, proposed spinning off unwanted operations and faced up to heightened scrutiny from regulators and the government following a string of industry scandals that sparked an ongoing judicial probe of misconduct.

The bank in June agreed to pay $700 million to settle the suit, brought by the country’s financial-intelligence agency, and admitted to failings including the late filing of mandatory reports and not sufficiently assessing risk.

In May, it admitted traders attempted to engage in “unconscionable conduct” in the setting of a benchmark interest rate and agreed to a $25 million fine. And the month before it was hit with a scathing report on culture at the bank and ordered by the prudential regulator to strengthen its capital buffers by an additional $1 billion.

CBA’s financial performance was affected by a 14 per cent drop in cash profit at its institutional banking and markets division to $1.12 billion for the year ended June 30, due to a slump in trading revenue.

Citi analysts said CBA’s cash profit result was slightly below consensus estimates, but is unlikely to put too much pressure on the recent share price rally.

“A lack of lending growth, continued NIM (net interest margin) headwinds and no discernible slowing in underlying cost growth is likely to keep any share price rises in check,” Citi said in a note.

CBA’s other divisions all delivered cash profit growth, with its retail banking services unit — which accounts for more than half of its profit — posting a 5 per cent rise to $5.19 billion.

Its business and private banking unit reported a 4 per cent rise to $1.88 billion, while its Bankwest subsidiary — which is in the process of closing 29 branches along Australia’s east coast — reported an 18 per cent rise to $681 million.

Tighter regulatory rules around home and investor loans benefited CBA in 2017-18, with the bank reporting a five basis point rise in net interest margin to 2.15 per cent from a year earlier.

Annual cash profit at CBA’s wealth management and New Zealand operations jumped 33 per cent and 12 per cent, respectively.

Excluding the one-off items, CBA’s annual cash profit was up 3.7 per cent.

The bank’s annual report, also released this morning, showed that Mr Narev lost more than $5.3 million in bonus payments in 2018 following the Austrac scandal.

The report said Mr Narev was “terminated” from his position in April, and had agreed to forfeit a short term bonus of $2 million last financial year.

He was also stripped of a $3.3 million in long term bonus payments, and gave up the potential to receive a further $13.9 million in unvested long term bonus payments.

In total, Mr Narev was paid a base salary of a little over $2 million last financial year, down from the previous year’s $5.7 million.

Former Commonwealth Bank CEO Ian Narev. Pic: AFP

Mr Narev left the bank on April 8, following the wholesale clean-out of the lender’s executive ranks in response to the Austrac debacle.

The annual report revealed the “termination benefits” of former executives, including ex-institutional boss Kelly Bayer Rosmarin ($966,000), ex-chief financial officer Rob Jesudason ($539,000), ex-wealth boss Annabel Spring ($1.4m) and former chief information officer David Whiteing ($915,000).

Despite the lower profit, CBA had fewer bad debts, with the loan impairment expense falling 1.5 per cent to $1.08bn.

The group’s return on equity sagged 160 basis points to 14.1 per cent.

The bank’s net interest margin, a profit measure based on the difference between the rate at which a bank borrows and lends, widened by 0.05 percentage point over the year to 2.15 per cent despite home-loan switching by customers and a rise in wholesale funding costs narrowing the margin 0.02 percentage points between the first and second half of the financial year.

With Dow Jones