By Paul Rickard
Commonwealth Bank’s AUSTRAC fiasco has become a classic media beat-up. Led by the anti-business ABC, supported by some Fairfax cheerleaders, and then the usual cabal of Canberra politicians, this story has been done to death. CBA has been tried, found guilty, and hung by the media before it is yet to even file a defence. This is not the making or breaking of the Australian banking industry.
Sure, CBA deserves a material fine, some Executive heads need to roll, and it is quite proper that the CBA Board has slashed bonuses and set up an independent Board Committee to oversee the remediation programme. Further, the Bank hasn’t handled the incident well, starting from a fumbled response last Friday when the story broke, selective media interviews on Sunday (rather than a full press conference), and the lack of contrition in its response.
It is this lack of contrition that really gets the public mad, and comes after earlier failings with life insurance, financial planning and Storm Financial. Facts such as the CBA making 4,000,000 suspicious transaction reports each year to AUSTRAC - 12,000,000 over the period in question - fail to get a mention because the public is so annoyed with the banks inna general, and CBA in particular. Instead, the media multiply the number of offences (circa 53,000) by the maximum fine to beat the story up and come up with an absurd statement that the fine could be in the “trillions of dollars”. Even claims of “billions” are arrant nonsense.
As an ex CBAer, I am going to be accused of being “part of the family” and having lost perspective on this issue. But unless there has been a cover-up by management or they negligently dismissed advice to fix the problem, I don’t think so. It is possible that overseas regulators such as the US Federal Reserve might show an interest and conduct their own investigations, which may lead to other fines, however I think this is unlikely.
Investors should keep perspective and focus on CBA’s bottom line. Yesterday’s full-year profit result ticked most of the boxes.
CBA’s Profit Result
CBA reported a cash profit of $9.88bn for the full year, up 4.6% on the prior year and about $100m better than market forecasts. For the June half year, the cash profit was $4.97bn, up 7.1% on the corresponding period in 2016.
Highlights of the result included:
On the other side of the ledger, weaker parts of the result included:
The Bank also announced that it is in discussions with third parties about its life insurance businesses in Australia and New Zealand (operated by CommInsure and Sovereign respectively), which may lead to divestment in due course.
Looking ahead to the next financial year, CBA faces some financial headwinds:
However, the capital cloud has been lifted, the net interest margin has stabilized (showing the pricing power of the banking majors), interest rates will head higher, which will be a positive for margin, bad debts remain under control, and there is still an enormous opportunity to take out cost.
At $81.11, CBA is not cheap and is trading at a premium to its rivals. However, with the earnings and dividend clouds removed and a reasonable expectation that they can be maintained if not increased in the years’ ahead, a 5.3% fully franked dividend yield (7.5% grossed up) looks tempting. CBA is in buy territory.
CBA trades ex the $2.29 dividend on Wednesday 16 August. A 1.5% discount will apply to shares issued under the dividend re-investment plan. Shareholders can elect to participate in the scheme if they notify the Registry by Friday 18 August.
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