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BFCSA: CBA faces mounting costs as financial scandals bite

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CBA faces mounting costs as financial scandals bite

The Australian 12:00am May 11, 2018

Michael Roddan


The verdict on the challenges faced by Commonwealth Bank is that things will probably only worsen from here, with legal bills and spending on overhauling the lender’s compliance frameworks continuing to expand.

CBA this week revealed that the litany of scandals rocking it have started to bite as the nation’s largest bank disclosed a drop of almost 10 per cent in quarterly profit amid signs more borrowers were falling behind on their mortgages.

“This is the first time we have seen a major bank comment on the impact from pressures on household cash flows,” UBS analyst Jonathan Mott said.

CBA shares yesterday fell for a second day — wiping more than $4 billion from the bank’s market capitalisation — as investors digested the surprisingly weak results.

The bank said expenses increased by 3 per cent, as it grappled with the costs and legal bills associated with the royal commission, its Federal Court case against anti-money-laundering regulator Austrac and the legal suit from the Australian Securities & Investments Commission over the alleged rigging of the inter-bank lending benchmark rate.

Mr Mott said the result “was weak” and that new enforceable undertakings lodged against the bank would continue to bite. “These EUs will continue to add higher legal, compliance and project costs and are likely to be disruptive to the course of business,” he said. “We do not believe these costs will be one-off in nature.

“Further, we believe it may be challenging for CBA to undertake a material cost-out strategy to offset revenue pressure while going through these EU processes.”

Macquarie analyst Victor German said there was an “ongoing element of conservatism” in the way the bank approached its future regulatory spend, which may mean the bank can manage its expenses better into the future.

“It appears that ongoing regulatory issues will continue to be a feature of CBA’s cost base. In total, we expect provisions for compliance and regulatory-related costs to reach about $500 million-$600m in the 2018 financial year,” Mr German said.

A mediation hearing between CBA and Austrac is to be held soon and the allegations are expected to be settled out of court. CBA has made a $375m provision to cover the costs and expected penalty stemming from the claims. The royal commission is also expected to result in a bill that could reach above $50m.

“The risk of a greater regulatory and compliance spend burden on CBA relative to peers appears to be materialising,” Morgans analyst Azib Khan said. “We reiterate the risk of a cut to CBA’s long-term credit rating,” he said.

“CBA remains our least preferred major bank.”

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