The Commonwealth Bank shares were hit hard yesterday, falling to a near five year low after the bank produced what investors took to be a weak third quarter trading update, and yet another fine to settle a legal action from regulators.
The bank revealed an unaudited third-quarter cash profit of $2.35 billion, around 2% lower than the average profit of each of the first quarters, and 2.1% lower than the unaudited figure for the previous corresponding period of 2017.
Investors didn’t like the news at all the sold the shares down by more than 2.1% to a close of $71.41, the lowest close for 58 months. The shares hit a low during the day of $70.80, the lowest they have been since July 2013.
Despite the market thumbs down, it wasn’t a weak result.
Given all the self-inflicted pain at the bank – from did advice, to losing the historical records of 20 million customers, to the Austrac money laundering claims (all 53,000 plus of them), as well as early revelations from the banking Royal Commission, it was a solid effort for the country’s biggest bank.
CBA said net interest income was broadly flat and the net interest margin – a key measure of lending profitability – because of a move away from higher-rate interest-only lending to variable principal-and-interest mortgages. High loan volumes partly offset the impact of the switch.
As well there were two fewer working days in the quarter this year and that a $100 million impact. So accounting for that net interest income was essentially flat.
Other banking income was lower thanks to a fall in the treasury and trading result, as well as seasonally lower card fee income.
The underlying operating expense increased by 3%, which was driven by increased provisions for regulatory and compliance project spend (banking royal commission legal expenses.
The CBA included a $375 million expense provision (unchanged) for an estimate from the AUSTRAC proceedings in the reported figure, the “underlying” comparison excluded the AUSTRAC provision.
The CBA also pointed to higher home loan arrears in the third quarter as borrowers struggled with stagnant wage growth and the rising cost of living.
The number of home loans whose repayments are 90 days or more overdue rose to 0.65% of its book in the three months to March 31, from 0.59% three months earlier.
"There has been an uptick in home loan arrears, influenced by a small number of customers experiencing difficulties with rising essential costs and limited income growth," CBA said in a trading update on Wednesday.
Stripping out Western Australia, which has been hit by the end of the mining boom (and has been a problem for all the banks), home loan arrears still rose from 0.47% to 0.53%.
But that seems to be peculiar to the CBA. For example, Westpac pointed out in its March 31 half year report on Monday of this week that there was “Little change to 90+ day delinquencies over the half” and that “Properties in possession reduced to 398 over the half, out of a portfolio of about 1.6 million loans.”
Commonwealth Bank’s CET1 (APRA) capital ratio continues to improve – it was 10.1 at the end of March, up 0.37% increase since December 2017 after allowing for the interim dividend. However, CBA said the sale of its life insurance operations in the the December six months will add 0.70 percentage points to that ratio.
APRA’s requirement that CBA holds an additional $1 billion in regulatory risk capital until it addresses regulatory concerns dropped its Common Equity Tier 1 ratio to 9.8% on a pro rata basis. That life insurance sale should repair that.
Meanwhile the Commonwealth has agreed to pay $25 million to settle legal action brought against it by ASIC over bank bill swap rates.
The bank said yesterday it had reached an in-principle settlement with ASIC under which it will acknowledge attempting “to engage in unconscionable conduct” and that it could not adequately monitor trading and communications of staff.
The amount is around half the amount paid by rivals National Australia Bank and ANZ in similar settlements related to alleged manipulation of the key interest rate but those settlements covered more breaches than those acknowledged by CBA.
“In the course of trading on the BBSW market in Australia on five occasions between February and June 2012, CBA attempted to engage in unconscionable conduct in breach of the ASIC Act," CBA said in a statement on Wednesday.
“CBA will also acknowledge it did not have adequate policies and systems in place to monitor the trading and communications of its staff in order to prevent that conduct from occurring,” the bank said yesterday.
CBA has also agreed to enter into an enforceable undertaking with ASIC, under which an independent expert will review its BBSW business. The deal has be approved by the Federal Court.
