Analysts back CBA’s $700m fine but point to challenging outlook

Commonwealth Bank’s record $700 million fine removes a key source of uncertainty hanging over the stock, analysts say, but many caution it still faces challenges from higher costs, reputational damage and a large number of senior executive vacancies.

After CBA on Monday announced the hefty fine as part of a settlement over thousands of breaches of anti-money laundering laws, bank-watchers said the fine was financially manageable for CBA and would not threaten dividends.

Commonwealth Bank shares rose despite accepting a $700 million penalty for breaching money laundering regulations.

Commonwealth Bank shares rose despite accepting a $700 million penalty for breaching money laundering regulations.

Photo: Dean Lewins

Even so, several were cautious about the outlook for the country’s biggest bank, which has faced a series of scandals in recent years, capped off by the money-laundering compliance scandal.

UBS analyst Jonathan Mott predicted higher ongoing compliance costs for CBA from the need to improve its anti-money laundering systems. He said CBA’s assumption that higher compliance expenses would be a one-off was “very optimistic”.

“We have therefore continued to include higher business-as-usual compliance costs into our forecasts but note there remains risk to the downside,” said Mr Mott, who has a “neutral” rating on CBA shares.

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Investors again lifted Commonwealth Bank share price on Tuesday with shares trading at $70.57 in the mid-afternoon up 1.26 per cent.

Credit Suisse analyst Jarrod Martin said the settlement “put to bed” one of CBA’ “most serious conduct issues”, but it did not resolve the reputational problems facing CBA. Mr Martin estimated there would be another $500 million in conduct and litigation expenses for the 2019 financial year.

“We expect CBA to continue to lose share to peers, with reputational damage and executive transition (nine new executive positions in 12 months) impacting CBA’s ability to defend its position,” said Mr Martin, who is “neutral” on CBA shares.

The bank is also facing a class action over its disclosure of the compliance breaches, and the law firm running the case, Maurice Blackburn, argued the fine dished out to CBA strengthened its claim.

“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,” national head of class actions, Andrew Watson, said.

The fine is equal to a 7 basis point reduction in CBA’s common equity tier 1 (CET1) capital ratio, a key gauge of bank strength. Deutsche Bank analyst Anthony Hoo said this reduction was “manageable” for the CBA, which is also raising capital by selling off various wealth assets.

But Mr Hoo said the stock would continue to face “short-term risks”, including a “management void” from the large number of unfilled top executive positions, and the possibility that Matt Comyn uses his first result as CBA chief executive, in August, to take restructuring charges. Mr Hoo has a “hold” rating on the stock.

Macquarie analysts, who also have a “hold” rating, predicted CBA would maintain its dividends in the second half, but they removed special dividends from their forecasts for the 2019 and 2020 financial years.

“Given challenging earnings trends, uncertainty around the level at which earnings are likely to settle and the current instability in CBA’s management team, we believe the premium is difficult to justify,” the analysts wrote.

Morgan Stanley analyst Andrew Stadnik, who is “underweight” on CBA, said the fine was $200 million higher than he had forecast, and the bank’s CET1 ratio of 10.6 per cent was “tight.”

Clancy Yeates

Clancy Yeates writes on business specialising in financial services. Clancy is based in our Sydney newsroom.

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