When the wave of scandals and controversies engulfing Commonwealth Bank began, there was a view that the financial impacts would barely register in the context of earnings approaching $10 billion a year. It’s now becoming apparent that was misguided.
As the litany of breaches and breakdowns in CBA's systems and culture has mounted, so too have the related costs, many of which are ongoing and which are now starting to surface within - and blemish - the bank's results.
The scale of the task confronting new chief executive Matt Comyn and his team to preserve the bank’s record of stellar financial performance is looking ever more daunting.
CBA provided its third-quarter trading update on Wednesday morning, and also announced an in-principle-agreement of the terms of a settlement with the Australian Securities and Investments Commission over the allegations that it had attempted to manipulate the bank bill swap rate (BBSW), a key benchmark for interest rates on business loans.
CBA has conceded that its employees had, on five occasions, attempted to engage in unconscionable conduct and disclosed it would pay a $5 million penalty, a $15 million contribution to a consumer protection fund and $5 million towards ASIC’s costs - $25 million in total. National Australia Bank and ANZ both previously paid $50 million each to settle similar cases.
If it were just the alleged interest rate rigging, the impact on CBA wouldn’t be noticeable. But it isn’t of course.
CBA’s trading update showed a 9 per cent fall in underlying cash earnings in the March quarter, compared to the quarterly average it achieved in the December half-year, once the previously-disclosed $375 million provision the group has made against its estimate of the cost of settling the Austrac money-laundering litigation was excised from the first-half numbers.
There is, of course, no guarantee that Austrac will settle for that amount or, indeed, that there will be a settlement. The early costs of having to set money aside for regulatory and compliance projects were cited as the major factor in a 3 per cent increase in CBA’s operating expenses.
But the Austrac affair will cost CBA more than the simple cost of settling the litigation, assuming it can. It is a reasonable assumption that Comyn is anxious to put legacy issues like the Austrac and BBSW litigation behind him and the bank as quickly as he can. There are ongoing cost implications from those issues, however, that will linger.
CBA has said previously that the cost of strengthening its ‘’know your customer’’ processes and upgrading its financial crime technology will be about $120 million. It is also hiring more than 50 new financial crime compliance professionals and upgrading its fraud monitoring technology, so there is a mix of capital investment and ongoing costs from beefing up its compliance functions.
Then, of course, there is the outcome of the review of CBA’s governance, culture and accountability that was released earlier this month, along with a set of CBA undertakings that included a $1 billion increase in its common equity tier one (CET1) ratio.
The increase in its regulatory capital requirement effectively means that money that might have supported perhaps $12.5 billion of risk-weighted, interest-generating assets will be held in low-yielding qualifying securities.
The cost of that lost opportunity would have to be at least $100 million a year, if not significantly more.
That may, however, be the least of the costs flowing from banking regulator APRA's recommendations. CBA has said it will recruit the equivalent of about 800 full-time employees to remedy the defects in the organisation identified the regulator. There will also be a significant technology investment to fix the system the bank uses to identify and remediate compliance shortcomings.
The banking royal commission is only just gathering momentum. There will be more revelations of poor behaviour and more recommendations of civil and even criminal action against institutions and individuals.
More deficiencies, more costs
There will be more deficiencies exposed in the way the banks have dealt with customers (it’s certain because the commission is focusing on cases that generally have been identified by ASIC, usually after the institutions have self-reported the breaches).
There will - beyond the tens of millions of dollars of costs each of the banks face to respond to the commission - inevitably be other costs added to their cost bases in response to its eventual findings and recommendations. And then, of course, there will be the class actions…
The costs of CBA’s compliance breaches – the cost of fixing broken systems and processes, the cost of remediating affected customers, the settlements with regulators and the hiring of rafts of new compliance staff – when aggregated, won’t be immaterial even in the context of a group of CBA’s size.
The legacies of complacency
And adding to the costs directly related to CBA’s own missteps are the costs that flow from the collective misbehaviour of the major institutions – those flowing from the royal commission and the bank levy ( a tax surcharge) that Federal Treasurer Scott Morrison slapped on them to punish them (and, unsuccessfully, stave off the calls for a royal commission). For CBA, that’s another $300 million or so a year.
CBA’s shares fell sharply in response to its trading update and the announcement of the BBSW settlement. They are now down about 14 per cent since early January - which means CBA has lost about $20 billion of market capitalisation this year.
The legacies of its past complacency - as its outstanding financial performance generated false confidence about its compliance systems and processes - are now definitely registering with investors.This article was first published by https://www.smh.com.au/
Author: Stephen Bartholomeusz