CBA short-circuits culture shock

A revenue cloud hangs over Commonwealth Bank after the lender produced its first profit decline since the global financial crisis.

A revenue cloud hangs over Commonwealth Bank after the lender produced its first profit decline since the global financial crisis, reflecting a surge in compliance costs and the mammoth $700 million fine incurred for multiple money-laundering transgressions.

Unveiling a 4.8 per cent fall in cash profit to $9.23 billion, new chief executive Matt Comyn said he was “very optimistic” about the long-term prospects for the domestic economy, with falling unemployment, above-trend economic growth and low inflation.

However, in the short term, credit growth would be subdued compared to the past five years.

Growth in housing credit, in particular, would slow to about 4 per cent this year, although Mr Comyn said this was “unambiguously a good thing” for financial stability amid signs of mortgage stress in Western Australia and the Northern Territory due to rising power costs and limited income growth.

Mr Comyn is seeking to rebuild CBA following a money-laundering scandal last year that triggered a top-level executive clean-out and a damning assessment of the bank’s culture by regulator the Australian Prudential Regulatory Authority.

“We do feel there is substantial potential left in the core business; it’s where our relative competitive advantage is,” Mr Comyn told The Australian.

The upbeat tone was undermined by the assessment of UBS analyst Jon Mott, who described the result as soft, with deteriorating revenue trends in the second half as “every banking revenue line” went into reverse.

CBA graph for business review

Second-half cash profit retreated by 4 per cent for CBA’s retail-banking engine room, business and private banking was down 3 per cent, and institutional banking slumped 10 per cent.

The bank’s disappointing revenue and profit momentum was belied by a strong share-price performance.

The stock strengthened into the close, gaining $1.92, or 2.6 per cent, to $74.81, as the 2c increase in the annual dividend to $4.31 dissipated widespread fears CBA would turn into an AMP-style ­implosion.

Apart from the good news on the dividend, the market was relieved to see that cash profit excluding one-off items lifted 3.7 per cent.

While the group net interest margin firmed by five basis points to 2.15 per cent over the year, net interest margin — a key measure of profitability — contracted by two basis points over six months due to lower home-loan margins.

Credit Suisse analyst Jarrod Martin said there was an expectation in the lead-up to the result that the scale of CBA’s challenges would force the board to slash the dividend.

“The result doesn’t in any way detract from the job that lies ahead,” Mr Martin said. “CBA faces one to two years of expense growth — in contrast to some of its peers — as the pig moves down the pipe, but the extreme downside risk scenario has been removed.”

On top of the previously announced $700m settlement with Austrac over a brace of money-laundering charges, the result was marred by 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, ASIC’s ­investigation of the bank, shareholder class actions, the Austrac proceedings, costs associated with the continuing financial services royal commission, and APRA’s prudential inquiry into CBA’s culture and governance.

CBA’s run of governance disasters blew a gaping hole in the pay of former chief Ian Narev, who has forgone up to $16m as a result of the bank’s multiple money-laundering transgressions and damning findings on the company’s culture. In total, some $100m in bonuses has been stripped from the bank’s executive ranks as a result of the scandal.

Even so, it was Mr Narev who suffered the biggest hit after leaving the bank on April 9 and taking a period of gardening leave until June 30.

Despite the gloom, Mr Comyn said the fundamentals of the business remained strong.

“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,” he said.

“We also continued to strengthen our balance sheet.”

CBA’s strategy under its new CEO is to become a simpler, better bank, which was again underscored yesterday by its exit from the TymeDigital business in South Africa at a cost of $91m.

The bank will now concentrate on retail and business banking in Australia and New Zealand, as well as its institutional banking operation.

Mr Comyn said CBA had the leading retail banking franchise in the nation, and it aimed to consolidate its position as the industry’s digital leader “bar none”. This called for more investment in data and analytics — an area of “relative strength” for CBA.

While there would be a much sharper focus on costs in the medium term, risk and compliance absorbed about half of $1.34bn in investment spending last year and was expected to be above 50 per cent in 2019.

Productivity and growth accounted for only 38 per cent of investment spending last year.

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

The consumer loan impairment expense was flat at 18 basis points, while the corporate expense lifted by two basis points to 10 basis points.

return on equity sagged 160 basis points to 14.1 per cent.