New analysis by Morgan Stanley’s Richard Wiles shows that Commonwealth Bank has recently diverted more of its annual investment spend towards compliance and risk.
According to the analyst, in 2014, the bank spent $284 million on compliance.
In 2015, that figure rose to $374 million, settling at $508 million in 2016.
“In 2017, the CBA spent $473 million with management commentary suggesting a significant uplift in anti-money-laundering costs over the past two years,” Wiles said in a client note.
In August, Austrac, Australia’s financial crime-fighting unit, launched legal action alleging Australia's lender breached anti-money laundering and anti-terrorism financing laws.
CBA and Westpac have invested more than their peers, with $2.5 billion of cumulative spend (ex compliance) between 2015 and 2017 compared to around $2.2 billion for ANZ and $2.3 billion for National Australia Bank.
However, according to Wiles, CBA's productive investment spend has been falling and is now less than what Westpac is forking out.
“Furthermore, our analysis highlights that Westpac has actually had a higher level of productive investment spending than CBA since it decided in 2015 to increase investment to $1.3 billion, with more "directed towards service, growth and efficiency initiatives”
The importance of Westpac’s investment was recently underlined by a UBS report which claimed that Australia’s second-largest lender is very well placed to benefit from AI.
The report highlighted that 56 per cent of Westpac's customers are active digital customers and pointed to major upgrade of the bank’s customer service hub, which has been designed to sync customer inquiries across multiple points of customer contact.
Moreover, Westpac plans to move 70 per cent of core banking processes onto the cloud over the next ten years.
According to Wiles, NAB now plans to catch up, but this leads to falling earnings per share in 2018, with less margin for error on capital and dividends.
The business-focussed lender recently told its shareholders that it is now "accelerating its strategy to drive productivity and growth" by lifting its annual investment spend from $1 billion to $1.5 billion over 2018 and 2020.
“However, we've previously expressed a view that it faces a franchise re-investment burden, and we don't assume stronger-than-peer revenue growth in our forecasts," argued Wiles.
The broker report suggested that ANZ should reinvest.
“We would not be surprised if it used some of its excess capital to enhance growth and productivity via a one-time restructuring charge.”