CBA's $700m fine removes uncertainty

The $700 million settlement of Commonwealth Bank’s fight with AUSTRAC relating to serious breaches of anti-money laundering and counter-terrorism financing laws removes a major uncertainty facing the lender's stock.

Banking analysts are calling the settlement a “significant positive” since it was feared the breach would cost CBA billions of dollars.

CBA will pay a civil penalty of $700 million with AUSTRAC’s legal costs of $2.5 million although this has yet to be approved by the Federal Court.

Australia’s largest biggest bank set aside $375 million as provision against potential fines in its 2018 first half resul with the remainder to be provisioned in the second half.

The residual non-tax deductible $325 million – equivalent to 18.5 cents per share - reduces CBA’s 2018 net profit forecasts by 3.3 per cent to $9.19 billion, according to CLSA’s Brian Johnson.

"Thereafter the impact is negligible."

Residual risks

In his view, while CBA still faces residual issues - the risk of similar action from the US Office of Comptroller over AML/CTF breaches, regulatory costs, APRA enforceable undertaking and class action -  the likely resolution of the AUSTRAC civil penalties case for a better-than-expected aggregate $700 million is a significant positive.

“We think the residual risks posed by the AUSTRAC AML/CTF actions are manageable and less than implied by CBA’s derating,"Johnson argued.

“CBA’s share register skew to “sticky” retail shareholders sees domestic and international institutions structurally underweight this large market capitalisation, benchmark heavy, high dividend yield stock.

“CBA has the least positive broker recommendation skew of the banks, domestic institutions have sold and the “bears have no shares”.

In a client note, he claimed CBA will likely be among the highest source of individual stock benchmark deviation risk in Asia.

Johnson also said CBA is moving closer to a significant EPS accretive buyback when the life insurance business sale and the IPO of Colonial First Sate Global Asset are completed before the end of this calendar year.

Moreover, he pointed out that with a premium mid-cycle ROE for 2019 return-on-equity of 14.71 per cent, CBA is more profitable than peers.

Still, the $700 million penalty represents an additional 5 basis point impact to core equity tier one capital, according to Morgan Stanley analyst Richard Wiles.

“We think CBA’s capital position continues to be tight at 10.6 per cent pro-forma CET1."

“The 65-basis point CET1 impost from AASB9 adoption, APRA's requirement to lift operating risk weighted assets, the maturity of non-recourse debt and now the AUSTRAC settlement will largely offset the 85-basis point capital release from the two Life sales.

Further in the future, he said the flagged sale of Colonial First Sate Global Asset management could leave CBA with surplus capital but would also create an earnings hole.

In a deal estimated at around $4 billion for CBA, the bank last month said it would create a new ASX-listed company to hold Colonial's assets.

Even though the CBA / AUSTRAC mediation has been resolved that scrutiny of bank industry conduct and competition adds to uncertainty and will continue to weigh on banks' trading multiples in the near term, Wiles argued in a client note.

Says Cedit Suisse analyst Jarod Martin: "This settlement puts to be one of the many outstanding conduct issues. However it does not resolve the growing reputational issue."

The analyst expects CBA to lose share to peers with reputational damage and executive transition - nine new executives in 12 months - impacting CBA’s ability to defend its position.

Maurice Blackburn Lawyers said the size of the AUSTRAC fine and the scale of the wrongdoing puts paid to any suggestion that these issues were not material to shareholders and should not have been revealed earlier than they were.

“Our view is that it clearly strengthens our claim, so it’s a positive development for all of our claimants involved in the class action we have on foot in the Federal Court.”

CBA's shares closed 1.60 per cent higher on Monday to $69.70

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