Commonwealth Bank Profit Hit by Compensation Costs -- Update

   By Robb M. Stewart

MELBOURNE, Australia--Commonwealth Bank of Australia's (CBA.AU) annual profit was squeezed by margin pressure and the rising cost of compensating customers for past failings, though it flagged signs of stability in the housing market.

The bank, Australia's largest by market value and the country's biggest mortgage lender, recorded an 8.1% drop in net profit for the financial year as customer remediation costs swelled by about 1 billion Australian dollars (US$675.8 million). It also struggled with a dip in income as lending and deposit volume growth was offset by compensation, the removal and reduction in certain customer fees, and a rise in compliance and wages costs.

Still, Commonwealth Bank held its dividend steady and said it had neutralized the discount on its dividend reinvestment plan and would consider options for returning capital to shareholders after the sale of assets further bolstered its balance sheet.

"We're making very good progress on becoming a simpler and better bank, both simplifying our portfolio as well as the way we operate and serve our customers," said Matt Comyn, the former head of retail banking who took over as chief executive in April 2018.

Net profit fell to A$8.57 billion in the 12 months through June from A$9.33 billion the year before. It was the second year running that Commonwealth Bank's profit has declined.

After years of benefiting from low levels of soured loans and dominant positions in a booming mortgage market, the nation's biggest banks have struggled with headwinds to revenue growth from a retreat in property prices and customer compensation and compliance costs. Regulatory and political scrutiny has also increased following last year's damming government-ordered probe of misconduct in the financial industry, which revealed a number of cases including widespread charging of fees for financial advice that wasn't delivered.

Commonwealth Bank, which has a market value of about A$141 billion, said the cost of its ongoing remediation program had now climbed to almost A$2.2 billion as it spend more on refunding fees charged to wealth and banking customers.

Cash earnings, a measure followed by analysts that strips out items including currency hedging volatility and losses or gains on asset sales, fell by 4.7% to A$8.49 billion on ongoing operations, missing expectations.

However, the bank maintained its dividend for the second half of the year at A$2.31 a share, for an unchanged full-year payout of A$4.31.

Commonwealth Bank last week completed the A$4.2 billion sale of its global asset-management business, Colonial First State, and it is awaiting final regulatory approval for the A$688 million exit from its stake in China's BoComm Life Insurance. That gave it the flexibility to consider capital-management options, including a possible off-market share buyback, it said.

Commonwealth Bank, viewed by analysts as a bellwether for the industry due to its scale, said the recent escalation of the trade dispute between the U.S. and China was a clear risk to global growth assumptions, but more positively there were signs of a recovery in Australia's housing market. Prices in Sydney and Melbourne have risen for the last two months, the first rebound since mid-2017, and there has been a pick-up in housing credit growth, Mr. Comyn said.

The bank logged home and business lending growth of 4% for the year, though competition and customers switching from higher-margin mortgage options saw its net interest margin, a profit measure based on the difference between the rate at which a bank borrows and lends, contract slightly over the financial year. Operating expenses also rose by 2.5% for the year with the remediation program, wage inflation and information technology spending.

Commonwealth Bank's annual loan-impairment expense was 11% higher at A$1.2 billion, but it said credit quality remained sound. Customers falling behind on personal loans remained elevated, with pockets of stress in Western Sydney and Melbourne, though there was a modest improvement in customers falling behind on home-loan payments, it said.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

August 06, 2019 19:58 ET (23:58 GMT)

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