CBA's Hayne fallout to top $2b
James EyersSenior Reporter
May 13, 2019 — 9.09am
Commonwealth Bank has set aside a new, $714 million provision for customer remediation costs, bringing total refunds and related costs for failings in its banking and wealth divisions to more than $2 billion.
The bank's quarterly earnings update, which disappointed the market and sent the shares down by 2.5 per cent to $73.52 on Monday morning, highlighted the tough environment for banks, as cash earnings fell sharply lower, the group net interest margin contracted and impaired loans ticked slightly higher.
CBA said it had foregone $415 million in revenue after removing or reducing fees and introducing pre-emptive fee alerts that remind customers to take action to prevent them being charged on overdrawn accounts or credit cards.
CBA chief Matt Comyn. Bloomberg
CBA also announced on Monday that non-executive director David Higgins would retire at the end of the calendar year, as a program of board renewal under chairman Catherine Livingstone continues.
Chief executive Matt Comyn told analysts that while CBA remains committed to reducing the cost-to-income ratio below 40 per cent, this should be seen as a "medium term ambition", as CBA is forced to continue to fund more spending on risk and compliance.
75.03 at May 19
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Updated: May 13, 2019 — 2.25pm
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"We are certainly committed to structurally reducing our cost base, which is critical to ensure we remain competitive for the long term," Mr Comyn said.
"But one, we want to make sure we do that in a sustainable way that does not damage our franchise strength or our operating momentum. And two, as this quarter and the last half has highlighted, we have a number of near-term headwinds in the context of elevated risk and compliance spend, which we think is critical."
Unaudited cash profit from continuing operations fell about 9 per cent to about $1.7 billion for the third quarter ending March 31, excluding the extra customer compensation costs. Expenses rose 24 per cent with the provision included, and edged up 1 per cent without it. Operating income was down 4 per cent. The impaired loan expense of $314 million was 17 basis points of gross loans, up from 15 basis points at the first-half results in February.
Explaining a tick up in the number of customers more than 90 days overdue in repaying mortgages, credit cards and personal loans, CBA pointed to "subdued levels of income growth and cost-of-living challenges, most pronounced in outer metropolitan areas of Perth, Melbourne and Sydney". It reported "pockets of stress" emerging, as some home loan customers were "experiencing hardship".
Of the new pre-tax $714 million provision, $334 million of this related to compensating customers for fees charged where no service was provided by the bank's aligned advisers. A further $72 million related to fees for no service in the Commonwealth Financial Planning business.
CBA said its advice provision assumed a refund rate of 24 per cent of the ongoing service fees collected in the decade to 2018, excluding interest.
Mr Comyn said CBA is "committed to improving outcomes for our customers, addressing past failings and compensating customers quickly".
A new $152 million was provided for refunds to business banking customers, including those using bank guarantees and cash deposit accounts. CBA said it would "continue to monitor the adequacy" of the provisions and a "range of matters where the outcome and any associated costs cannot be reliably estimated" had been treated as contingent liabilities.
The new provisions have increased the total cost of the remediation program to $2.17 billion.
CBA has spent $806 million determining how much compensation it has to provide customers and on implementing royal commission recommendations.
New regulation on charging interest on credit cards reduced CBA's income by $52 million over the full financial year.
Analysts are concerned pressure on banks to do more for customers will result in further fee cuts being made.
"Are there other areas that you are looking at, so that potentially we come to FY20 and you've for a whole range of additional initiatives that could see that $415 million, as an annualised impact, increase?" Credit Suisse analyst Jarrod Martin asked Mr Comyn during the briefing.
Mr Comyn said products have been "thoroughly reviewed" and there are "no more that we are intending to bring in the near term". However, he added that "we recognise that it is a competitive market and over time, there will be changes to rates and fees."
The focus on reduced non-interest income at CBA comes after National Australia Bank last week said it would begin phasing out the first 50 of its 400 fees by the end of June, and aimed to remove hundreds more over the next two years.
CBA said home loans were growing "in line" with the system and the bank had recorded "continued growth in household deposits and business lending". However, the volume growth was "muted" by a "continued reduction in institutional lending balances and a slight reduction in the group’s net interest margin," CBA said in its update.
CBA's trading update on Monday comes after the other three major banks reported half-year numbers over the past fortnight, also dragged down by heavy remediation provisions as banks clean up after the Hayne royal commission. Before reporting its numbers, Westpac announced a new $510 million pre-tax provision for compensation advice customers.
CBA said its common equity tier-1 (CET1) capital ratio was 10.3 per cent as at March 31 and would increase as CBA divested assets. The bank said it now expected CommInsure Life sale to complete in the second half of calendar 2019, "subject to the timing of the necessary Chinese regulatory approvals". This and other previously announced divestments would increase CET1 by about 120 basis points.
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