CBA – It Is Not The Machines Fault – It’s Conduct

Australian banks have enjoyed a strong performance over the last 12 months.  Banks performance is linked to the Australian property market and record levels of household debt. 

  • Going forward revenue growth will be difficult due to:
    • the property market showing signs of pressure,
    • slowing business credit growth, and
    • the diminishing ability of households to increase leverage

With AUSTRAC’s actions it raises further concerns about conduct. Potential implications include material penalties, brand damage, higher costs, management changes, adjustments to strategy, and further scrutiny from APRA, politicians and the community.


Contraventions of the AML/CTF Act: Australia’s financial intelligence and regulatory agency, AUSTRAC, has initiated civil penalty proceedings against CBA for “serious and systemic non-compliance” with the Anti-Money Laundering and Counter-Terrorism Financing Act (AML/CTF Act).

Growing political and regulatory scrutiny: We’ve been concerned about growing scrutiny of conduct and competition since a House of Representatives Standing Committee released its review in November 2016 and noted that “Australia’s major banks have let Australians down too frequently in too many ways” (refer Australia Banks: Conduct and Competition). CBA has faced a number of high-profile conduct-related issues in recent years, including Storm Financial (2012), poor financial planning advice (2014) and rejected life insurance claims (2016).

Lessons from Europe: Since 2009, European banks currently covered by Morgan Stanley Research have incurred fines of >US$17bn for US sanctions and AML. Subsequently, the cost of process and system remediation has increased materially (refer Introducing an ESG Framework for the European Banks).

Potential penalty: We believe the size of any potential penalty is difficult to predict. However, using the Tabcorp outcome as a guide, a range of ~A$50m to ~A$2.5bn could be possible. The top end of this range equates to ~1.7% of market cap, ~18% of FY18E earnings, or ~55bp of CET1 capital on a pre-tax basis.

Other implications: In addition to penalties, we see six other potential implications for CBA: (1) brand damage; (2) material costs for process and system remediation; (3) management changes; (4) changes to CBA’s sales and growth strategies arising from broader concerns about conduct; (5) greater oversight from APRA; and (6) higher probability of a Royal Commission into the banking sector, or other inquiries into conduct and pricing.

UW rating: AUSTRAC’s action reinforces our view that increased political and regulatory weighs on the banks’ outlook in 2018-19 (refer Australia Banks: Near Team Gain, Long Term Strain). In our view, CBA is vulnerable to a de-rating as its EPS and dividend growth prospects decline and its ROE gap to peers narrows.

Source – Research report from leading broker.