Commonwealth Bank

The gradual emergence of CBA as the worst behaved Australian bank – in fact let’s be honest, the only badly behaved one – is truly shocking.

The big four have always been seen as virtually interchangeable in most respects, and CBA has always captured a premium, mainly because of its bigger market share of home lending which has been the business to be in this past decade or so. Twenty years ago, when business banking was more important, CBA traded at a discount.

That premium is still there, but less so:

In the same way that the Royal Commission into Institutional Responses to Child Abuse was mainly an inquiry into the Catholic Church, the Royal Commission into “financial entities” is mainly about CBA.

This week AUSTRAC issued a new statement of claim against CBA, increasing the number of alleged contraventions from 53,700 to 53,800.

CBA now agrees that it was late in filing 53,506 threshold transaction reports (for ATM transactions above $10,000), that it did not adequately adhere to risk assessment requirements for Intelligent Deposit Machines (IDMs) and that it did not adhere to all its transaction monitoring requirements. It also admits 91 out of 174 allegations concerning suspicious matter reports (SMRs) and 52 out of 71 allegations concerning ongoing customer due diligence requirements.

Dear oh dear.

As for the consequences of all this…well, the AUSTRAC allegations against CBA (alone) clearly tipped the political balance in favour of a Royal Commission. The CEO of CBA has been moved on – more gently in the circumstances, than you might have expected – CBA is spending more money on its processes and APRA is all over it like a cheap suit.

There is also some brand damage, hard to quantify but real, plus management distraction, and coming up there will be some real fines and a class action from shareholders – angrily suing themselves.

What the fines and lawsuit could add up to is anybody’s guess: each contravention theoretically attracts a fine of $18 million and 53,506 times that is a trillion bucks, but CBA argues that it was all a single software coding error. Nevertheless, the fine probably can’t be in the mere millions – it might need to start with “B”.

If the class action goes for loss of market cap, then that’s down about $12 billion since April, but not all because AUSTRAC. Half that? Perhaps.

Overall, CBA is in a world of pain and its one-year forward dividend yield is still below all the other majors – 5.6% versus 6.1% for Westpac, 6.7% for NAB and 5.7% for ANZ.

It is definitely not a “buy” in those circumstances. The reason to accept a lower yield is because capital growth and/or safety is likely to be greater. That is no longer true of Commonwealth Bank, doubly so with the housing market coming off.

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About Alan Kohler

As well as being the founder of The Constant Investor, Alan is currently business editor at large of The Australian, finance presenter on ABC news, presenter of the Talking Business channel on Qantas inflight radio and adjunct professor in the business faculty of Victoria University.

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