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