System Alert – Does Not Comply With Responsible Lending!

The Royal Commission looking at Financial Services Misconduct heard today that the Commonwealth Bank’s automated system for approving overdrafts failed and so for four years from 2011 it gave some customers a line of credit they shouldn’t have received.

As a result, the volume of overdrafts rose significantly from 228,000 in 2012 (up 80% from the previous year) to 550,000 in 2014. The bank said its automated system “spat out” wrong approvals and was “doomed to fail” because of bad design.  We discuss this in our latest video blog.

In fact, questions were raised by consumer advocacy groups before the bank released there was an issue. The implementation of serviceability assessments was not made correctly. As a result of changes made to the system, the bank failed its responsible lending obligations.

It was also slow to interact with the regulator on this issue.  Once again, cultural and behavioural issues were in the spotlight.

The object lesson here is that automated credit decision systems can lead you up the garden path.  This is important given the current rush to digital channels and more automation.

CBA’s Mea Culpa

CBA’s new CEO Matt Comyn has written to staff as the the blow touch is applied by the inquiry.

This week the Royal Commission into Misconduct in Banking, Insurance and Superannuation commenced hearings in Melbourne.

From the outset, we said that we were absolutely determined to be cooperative and open with the Commission. Unfortunately, as we heard on Tuesday, our first submissions did not meet the Commission’s expectations. This was never our intention and we will resubmit our information as soon as possible and ensure we have fully met the requests of the Commission. We will work to make sure this doesn’t happen again.

There will be cases highlighted next week where customers have been treated unfairly by us. In many cases, our actions have had a significant impact on the financial and emotional wellbeing of our customers. This is unacceptable.

Where we have made mistakes we must and will take responsibility for them, we will make things right for our customers, and not repeat the same mistakes. We will exceed our regulatory and compliance obligations, and enhance the financial wellbeing of every single customer we serve.

Together, we will make our bank better, and one we can all continue to be proud of.”

‘Excessive’ bank CEO pay under scrutiny

From Investor Daily.

The disparity between bank CEO pay and average weekly earnings is contributing to the uncompetitive nature of Australia’s economy, argues progressive think tank The Australia Institute.

The GFC+10: Executive Pay in Australia report released yesterday by the Australia Institute has scrutinised the pay packages of executives at Australia’s biggest companies 10 years on from the global financial crisis.

Homing in on banks, which had “been a particular focus of attention” in recent times, the report found NAB and Commonwealth Bank of Australia bosses respectively earned 108 and 93 times the average weekly earnings in 2017.

“Pay for the NAB CEO peaked in 2004 but even if we ignore that spike the data still show that CEO pay was increasing rapidly during the bulk of the 2000s, as people were expressing the most concern.”

For the chief executive of CBA at the time, the spike in pay was widest in the lead-up to the global financial crisis.

In fact, seven- or eight-figure remuneration packages were “likely to have played an important role in the global financial crisis” wherein chief executives risked long-term performance for short-term gains, the report said.

Such a significant gap in the earnings of average workers compared with top executives also reflected “to a large extent the uncompetitive nature of the modern Australian economy”.

“It has to be stressed that the issue of massive CEO pay is one associated with industry concentration and the dominance of big business in the Australian economy,” it said.

“According to tax office data 390,774 companies reported a positive income and declared taxable income of $281 billion, giving the ‘average’ company an income of $719,201 in 2015.

“An economy dominated by ‘average’ companies could never pay CEOs anything like the amounts going to the CEOs of the top Australian oligopolies and monopolies,” said the report.

While “growth in CEO pay was quite dramatic in the lead up to around 2007 or 2008” and had moderated since then, the report concluded remuneration for these top executives “remains excessive”.

Aussie Home Loans Relied On The Banks To Trap Mortgage Fraud

From Business Insider.

CBA owned mortgage broker Aussie Home Loans does not have the capability to detect fraud committed by its brokers and instead waits until the banks detect scams and alert them as it does not have the resources.

The admissions were made by Aussie Home Loans general manager of people and culture Lynda Harris in a second day of questioning at the banking royal commission from counsel assisting Rowena Orr, QC.

It was revealed the company had recently bolstered the risk and compliance function at the broker to a total of nine employees.

Ms Harris was being questioned about the process behind the termination of an Aussie Home Loans broker Emma Khalil. Ms Khalil submitted multiple loan applications that were based on fake supporting documents including many from the same employer and with the same details.

“We don’t have that, we are reliant on the lenders to provide that expertise because ultimately they are the organisation that is approving the loans,” Lynda Harris said.

The fraud was not picked up until the client applied for a credit card with Westpac using different income details.

After the extent of the fraud committed by Ms Khalil was revealed, multiple internal emails between Aussie management revealed the broker was waiting for confirmation from Westpac before acting.

“If Westpac find that there was fraudulent activity on her part and revoke her accreditation, then that will be in breach of her contract and ultimately result in her termination from Aussie,” one such email read.

Ms Orr asked why Aussie was waiting to hear back from Westpac before terminating the employment of Ms Khalil despite identifying a number of suspect loans supported by similar or identical fake letters of employment.

“So Westpac – and in fact all large banks, have credit specialists and fraud teams that have the expertise to be able to determine fraud. We don’t have that, we are reliant on the lenders to provide that expertise because ultimately they are the organisation that is approving the loans,” Ms Harris said.

“What I want to put to you, Ms Harris, is that it’s not good enough, it’s not good enough that Aussie Home Loans outsources to a third party investigations of a fraudulent conduct made against one of its own employees. What do you say to that?” Ms Orr asked.

Ms Harris replied by saying that Ms Harris was not an employee of Aussie Home Loans and was in fact an independent contractor. She also said that company was not able to justify the expense.

Following an incredulous look from Ms Orr, Commissioner Ken Hayne sought clarification of the point

“It is open to me to conclude from your evidence from the time of the Khalil events and earlier, Aussie was of the view it was the role of the lender to investigate and determine whether there was fraud associated with one or more transactions?”

“Is it open to conclude from what you have told me that it remains Aussie’s view that it is for the lender and not Aussie to investigate and determine whether there was fraud associated with one or more transactions?”

Ms Harris explained the mortgage broker continued to invest in its systems and processes and hoped to develop a fulsome and rigorous process for the detection of anomalies in the loans submitted by its brokers.

She said the mortgage broker was developing a dashboard that would give it better visibility over its network however it was still in pilot phase.

Commission denies CBA’s request not to publish evidence

From Australian Broker.

The royal banking commission has rejected CBA’s request not to disclose parts of evidence regarding the bank’s CreditCard Plus product.

The commission only agreed to keep confidential the name and policy number of the CBA consumer who made a complaint about the product.

In a note released last Friday, Commissioner Kenneth Hayne said CBA applied for a non-publication direction under s 6D(3) section of the Royal Commissions Act regarding parts of a draft statement to be given by a CBA employee about CreditCard Plus.

The evidence refers to CBA’s communications with ASIC regarding CreditCard Plus, an add-on insurance policy sold with credit cards, personal loans, home loans, and car loans. CBA said in its non-publication application that those communications should be treated as confidential.

ASIC announced in August 2017 that CBA would refund over 65,000 customers about $10m after selling them the consumer credit insurance product. The regulator said the product was unsuitable for those customers.

Details of the remediation program are among those CBA asked not to be published.

“General assertions are made that certain kinds of communication, such as, for example, communications between CBA and regulators, are confidential. Why the particular communications should be treated in this way is not explained,” said Hayne.

He added that arguments framed in such a way are “unhelpful and unpersuasive”.

“Absent ASIC joining in an application for a non-publication direction, I do not accept that a non-publication direction should be made in respect of any of those parts of the draft statement.”

Hayne said it was also necessary to bear in mind that CBA acknowledged in its first submission to the commission that the conduct concerned in the evidence fell short of community standards and expectations.

“CBA identified no damage to itself or any other person that would follow from publication of the material,” he said in closing.

In deciding to detail and publish its reasons for the decision, the commission seeks to provide “guidance” to others involved in its inquiry.

“The application made by CBA in respect of this witness statement does warrant a more elaborate statement of reasons and warrant publication of those reasons for the guidance of others who may seek a direction under s 6D(3),” said Hayne.

The royal commission is holding its first round of hearings from 13 to 23 March 2018 focusing on consumer lending.

Fitch Affirms Australia’s Four Major Banks

Fitch Ratings has affirmed the ratings of Australia’s four major banking groups: Australia and New Zealand Banking Group Limited (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank Limited (NAB) and Westpac Banking Corporation (WBC). The Outlook on each bank’s Long-Term Issuer Default Rating (IDR) is Stable.

The rating review focuses on the Australian-domiciled entities within each group and therefore does not encompass their overseas subsidiaries.


The Long- and Short-Term IDRs and Stable Outlook on all four banks are driven by their Viability Ratings and reflect their dominant franchises in Australia and New Zealand as well as robust regulatory frameworks. Stable, transparent and traditional business models have proven effective in generating consistently strong profitability, while the banks maintained a conservative risk appetite relative to many international peers. High exposure to a heavily indebted household sector and increased focus on conduct related issues from authorities offset some of these strengths.

Australia’s banking regulator has been critical in helping the banking system manage rising macroeconomic risks – including historically high household debt and house prices, low interest rates and subdued wage inflation – through strengthening underwriting standards and increasing capital requirements. This has contributed to improving the banks’ ability to withstand a severe downturn in the housing market and household sector should it occur.

However, a severe downturn is not Fitch’s base case. We expect Australian house prices to remain high relative to international markets, with modest price rises in 2018. Overall, property prices should be supported by low interest rates and population growth. Offsetting this is high household debt, falling rental yields, increasing supply and rising dwelling completions.

Household debt could increase further, driven by historically low interest rates and high house prices, as residential mortgages make up almost 70% of household debt. Household debt reached 188% of disposable income at end-September 2017. Combined with low wage growth and high underemployment, this leaves households increasingly susceptible to higher interest rates and deteriorating labour market conditions.

The four major banks dominate their home markets. Their combined loans accounted for 80% of Australia’s total loans at end-December 2017 and 87% of New Zealand’s gross loans at end-September 2017. The banks have simplified their businesses and footprints with a strong focus on their core banking operations in Australia and New Zealand, or are in the process of doing so. They have well established and long standing competitive advantages and strong pricing power – manifested in strong earnings, profitability and balance sheets – which is likely to be maintained over the next two to three years.

The increased focus on conduct and competition by authorities has resulted in the establishment of a number of inquiries, the outcomes of which are uncertain. This could limit the banks’ growth potential and pricing power, pressuring the banks’ company profiles and ultimately affecting their ratings, although any significant impact appears unlikely to arise within the next two years.

Conduct related issues may also negatively affect our view of risk appetite and ratings if they indicate widespread failing within a bank’s risk-management framework. All four banks have faced a number of conduct related issues in the previous few years, although we continue to see these as isolated cases and believe risk-management frameworks remain robust. CBA has faced particular scrutiny following the August 2017 announcement of failures related to its anti-money laundering and counter-terrorism financing requirements. This, combined with a number of other infractions, prompted a regulatory inquiry into CBA’s governance, culture and accountability. Findings of systemic failure by this inquiry could pressure CBA’s ratings.

Disruptors, particularly in the digital sphere, are increasing in prominence, although they remain a small part of the system. The disruptors also pose some longer-term risks to the franchises of the major banks, although management appears to be addressing this pro-actively with strong IT investments, which we expect to continue.

Fitch expects the banks’ credit risk appetite to remain tight. We believe the banks have robust risk management frameworks. Regulatory intervention and oversight provide an additional restriction on the banks’ ability to take larger risks by weakening underwriting standards. Fitch expects additional regulatory scrutiny on serviceability testing in 2018, particularly around the assessment of borrowers’ expenses, which should further strengthen underwriting. Limits on growth rates for investor and interest-only loans has seen the pace of growth in these products slow; we see these as riskier types of mortgages relative to amortising owner-occupier mortgages. The growth rates of these products could be further curtailed by proposals by the regulator to have them carry higher risk-weights than amortising owner-occupier loans.

We believe the banks’ asset quality is likely to remain a strength relative to similarly rated international peers, although some weakening is possible through 2018. Large losses are not probable without an economic shock, such as may occur if there was a sharper-than-expected slowdown in China. Industries, such as retail, may come under pressure from soft consumer spending due to low wage growth, high household debt and competition from online retailers. However, given the banks’ limited exposure to the retail sector, our base case means any deterioration should be manageable.

Fitch believes the Australian major banks are well-capitalised and will meet Australian Prudential Regulation Authority requirements for “unquestionably strong” capital ratios well ahead of the proposed deadline. Implementation of the final Basel III framework should not be onerous either. Comparisons of risk-weighted ratios with international peers are difficult due to the Australian regulator’s tougher capital standards relative to many other jurisdictions. These include, among other factors, higher minimum risk-weightings for residential mortgages through Pillar 1 and larger capital deductions.

Funding remains a weakness relative to similarly rated international peers. Fitch expects the banks to continue relying on wholesale markets in the medium-term, although strengthened liquidity positions and swapping borrowings into the functional currency – usually either Australian or New Zealand dollars – help offset some of this risk. The banks’ funding profiles are also supported by access to contingent liquidity through the central bank, if needed, and the likelihood that they would benefit from a flight to quality in a stress environment.

Profitability growth is likely to slow in 2018, reflecting Fitch’s expectations for slower asset growth, competition for assets and deposits, higher funding costs and a rise in loan-impairment charges from cyclical lows. Cost management will remain a focus, but could be affected by continued technology investment and regulatory-related costs.

Commonwealth Bank lodges response to amended AUSTRAC and class action claims

Commonwealth Bank of Australia (CBA) has today lodged with the Federal Court of Australia its response to the amended statement of claim filed by AUSTRAC on 14 December 2017 and its defence to the shareholder class action commenced by Zonia Holdings Pty Ltd on 9 October 2017.

In our amended defence in the AUSTRAC matter, we deny the majority of the 100 additional allegations.

In our defence of the class action matter, we categorically deny all allegations of liability.

We consider that we have complied with our continuous disclosure obligations at all times. There was no price sensitive information about the matters raised in the AUSTRAC proceeding that required disclosure.

AUSTRAC proceeding

 We understand that we play a key role in law enforcement and we take our anti-money laundering and counter-terrorism financing (AML / CTF) obligations extremely seriously.

During the period covered by AUSTRAC’s claim and to the end of 2017, we submitted more than 19 million reports to AUSTRAC, including over 4 million last year alone. During the same period we submitted more than 40,000 suspicious matter reports (SMRs). We also fulfilled more than 20,000 requests for assistance from law enforcement agencies last year.

We have invested more than $400 million in financial compliance systems to counter financial crime over the past eight years and employ hundreds of personnel dedicated to detecting and disrupting financial crime.

Of the 100 additional allegations in AUSTRAC’s amended statement of claim, CBA denies 89 allegations in full and admits 11 allegations in part.

Taking into account the allegations in the original claim as well as the amended claim, our response to AUSTRAC’s claim is summarised below.

Late Threshold Transaction Reports (TTR)

We agree that we were late in filing 53,506 TTRs but we will submit that, for the purposes of penalty, these should be treated as a single course of conduct.

AML / CTF Program

We agree that we did not adequately adhere to risk assessment requirements for Intelligent Deposit Machines (IDMs) – but do not accept that this amounted to 14 separate contraventions.

We agree that our transaction monitoring did not operate as intended in respect of a number of accounts between October 2012 and October 2015.

Suspicious matter reports

 AUSTRAC alleges 230 contraventions concerning suspicious matter reporting (SMR) obligations. We admit we made errors in 98 instances in connection with our SMR obligations, although we say that there were less than 98 separate contraventions.  We admit that:

  • 53 SMRs were filed late;
  • a further 45 SMRs should have been filed (above and beyond the 264 SMRs we actually filed in relation to the syndicates and individuals identified in the claim).

We deny 132 of the allegations concerning SMRs.

Ongoing customer due diligence requirements

We admit 56 (in whole or in part) but deny a further 53 allegations concerning ongoing customer due diligence requirements.

Further detail can be found in CBA’s Amended Concise Statement in Response.

Class action

In its defence to the class action, CBA categorically denies all allegations of liability made against it.

The class action alleges matters including that, between 1 July 2015 and 3 August 2017, CBA failed to disclose to the market material information in relation to aspects of its AML/CTF controls that are the subject of the AUSTRAC proceeding. The allegations include that CBA failed to disclose that it was potentially exposed to an enforcement action by AUSTRAC.

CBA rejects the assertion that it had any price sensitive information in respect of its AML/CTF controls environment or the risk of the AUSTRAC proceeding, and maintains that it at all times complied with its continuous disclosure obligations.

CBA has historically had a good relationship with AUSTRAC, with which it collaborates extensively including through the Fintel Alliance and the AUSTRAC private/public sector partnership. AUSTRAC has acknowledged CBA’s contribution in this field, including by inviting the executive in charge of CBA’s financial crime prevention team as the Australian financial services delegate to participate at the Joint Experts Meeting of the inter-governmental Financial Action Task Force in Moscow in April 2017.

CBA first became aware of AUSTRAC’s proceeding on the day it filed its statement of claim with the Federal Court on 3 August 2017.

CBA says that at no time prior to 3 August 2017 did AUSTRAC tell us:

  • that it had decided to take any action against CBA; or
  • about the number or nature of the contraventions it would be alleging against CBA.

CBA takes its continuous disclosure obligations seriously and will continue to vigorously defend the claim.

CBA Blocks Credit Card Purchases of Bitcoin Etc.

CBA has said that due to the unregulated and highly volatile nature of virtual currencies, customers will no longer be able to use their CommBank credit cards to buy virtual currencies. This came into effect as of 14 February 2018.

Our customers can continue to buy and sell virtual currencies using other CommBank transaction accounts, and their debit cards.

We have made this decision because we believe virtual currencies do not meet a minimum standard of regulation, reliability, and reputation when compared to currencies that we offer to our customers. Given the dynamic, volatile nature of virtual currency markets, this position is regularly reviewed.

The restriction on credit card usage for virtual currencies will also apply to Bankwest credit cards.


Why are we making this change?

  • Virtual currencies are unregulated and, as has been made clear in recent months, highly volatile. Effective 14 February, we will no longer authorise credit card purchases for these currencies.

How can I buy virtual currencies?

  • You can still buy and sell virtual currencies using other CommBank transaction accounts, and debit cards, as long as you comply with our terms and conditions and all relevant legal obligations.

I recently tried to purchase virtual currencies using my debit card and it was declined. Why did this happen?

  • We are aware of some instances where customers found that their attempts to buy or sell virtual currencies did not work. This can be due to a number of reasons, including:
    • The virtual currency exchange the customer is using has been blocked by our security systems. A currency exchange will be blocked if a number of the transactions it has previously processed are found to have been fraudulent, inconsistent with our policies or outside of the Group’s risk tolerance.
    • The payment method the customer uses is no longer accepted by the currency exchange. Some exchanges have recently stopped accepting certain payment methods.
    • The virtual currency exchange’s bank blocks the transaction for security reasons.

Can I still get credits from virtual currency exchanges paid to my credit card?

  • Yes, credits will continue to be authorised by the Bank onto credit cards.

CBA’s board needs to take ultimate responsibility for the bank’s failings

From The Conversation.

Something appears to be very wrong with risk management at the Commonwealth Bank (CBA), that cuts right across the bank. There have been risk management problems in the retail (money laundering), institutional banking (foreign exchange and bank bill swap rate benchmark manipulation) and wealth management (Comminsure scandal) arms of the bank.

This tsunami of scandals helped to trigger the Financial Services Royal Commission which will examine banking misconduct.

And the responsibility, the accountability for risk management stops, and starts, with the bank’s board.

In presenting its 2018 half yearly profits, the CBA board announced that the bank had set aside provisions of A$375 million in anticipation of a penalty resulting from failures to properly implement anti-money laundering controls.

In the media conference following the appointment of Matt Comyn as the new CEO of CBA, the chair of the banks’ board Catherine Livingstone, admitted, while it was:

…entirely appropriate to share a collective accountability for the issues that we have had… [that] the processes around operational risk management and compliance risk management…is where we have not performed as we should have.

In his first media conference as CEO, Mr Comyn, not surprisingly, concurred with his new boss.

And it became unanimous, when a few days later the progress report of the Australian Prudential Regulation Authority’s Prudential Inquiry Panel into the culture at CBA, reported that investigations were being focused on “capabilities and accountabilities for risk management in the organisation, particularly for operational, compliance and reputational risk”.

How the CBA manages risk

CBA’s latest annual report describes in some detail the risk management framework that is supposed to direct risk management across the bank. The framework, which incorporates the requirements of APRA’s prudential standard for risk management, comprises three main components: a risk appetite statement (which describes the types and maximum levels of risk that the board is willing to accept), a three year rolling group business plan and a risk management strategy.

The bank’s risk appetite is formulated by the Board Risk Committee, approved by the board, and dictates the levels of risk-taking in each business line.

In practise the bank actually follows what is called a Three Lines of Defence model. The so-called first line of defence is business management, which is responsible for the effective implementation of the board-approved risk management framework.

The second line is a separate group of staff with specific risk management skills to develop and monitor the risk management process. The third and last line is an independent group that acts as an internal audit function.

CBA is a large and complex organisation, and naturally there is a large, complex risk bureaucracy. This is detailed in the bank’s latest risk report.

However, APRA is clear that the board should take ultimate responsibility.

The lines of defence are clearly broken. If there had been one single, or maybe two, risk management failures at CBA, you could put it down to complexity, teething problems or just bad luck. But over the last decade, there has been a catalogue of bad risk decisions affecting the bank’s customers, shareholders and the Australian financial system.

After the first few times, surely the effectiveness of the risk framework and the three lines of defence should have been questioned and remedial action taken? But apparently it was not, and there is now frantic action by the people responsible – the CBA board – to do something (anything) about it.

In the media conference, Catherine Livingstone and the new CEO repeatedly talked about “collective accountability” and tried to diffuse the severity of the situation by talking about “organisation wide” and “culture” issues, as if even the staff in the bank’s branches were somehow to blame.

In fact, in the case of money laundering through ATMs that has drawn the ire of AUSTRAC, it was the first line business staff in the branches who raised the alarm. Their warnings were not taken seriously. To claim that the lower-level staff are somehow “collectively accountable” is bordering on the bizarre.

The accountability for the risk management failures is indeed spread far and wide but by far and away it is the joint responsibility of the board and executive committee. The knee-jerk reaction to cut a few bonuses is insufficient.

Someone in the board of the bank has to resign or be fired. Where failures are detected, bonuses already paid out, for example to recently retired board members, should be retrieved.

And going forward, the three lines of defence must become a real protection for customers rather than a convenient pretence, and APRA must ensure, for customers’ sakes, that the three lines are operating effectively in all large financial institutions.

Author: Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, Macquarie University

CBA 1H18 Results – A Mixed Bag

The Commonwealth bank has released their 1H18 results today. Overall a mixed bag, but the contribution from home loan repricing was significant, as were the various adjustments relating to AUSTRAC and other reviews. The impact of the reduction in ATM fees, the bank levy and changes to interchange fees all hit home.  Institutional Banking is under some pressure, so they rely on the retail bank to support the overall result.  This is a essay in complexity!

On a ‘continuing operations’ basis, the Group’s statutory net profit after tax (NPAT) for the half year ended 31 December 2017 was $4,895 million, which represents a 1 percent increase on the prior comparative period. This is below expectations.

Cash NPAT was $4,735 million, a decrease of 2 percent. Return on equity (cash basis) was 14.5 percent. Discontinued operations include the Group’s life insurance businesses in Australia and New Zealand.

Underlying operating income increased 4.9%, due mainly to higher net interest income which was up 6.2%. Lending volumes were up 3.5% . Other banking income was flat. Higher structured asset finance income and lending fees were offset by lower trading income in the institutional business reflecting reduced market volatility and by lower interchange rates and ATM fees in the retail bank.. Strong investment markets drove funds management income. This was partly offset by lower general insurance income which was impacted by higher claims due to weather events. Underlying operating expenses increased 4.7% to $5,318m, driven by a $200m expense provision for expected regulatory, compliance and remediation program costs.

The underlying cost-to-income ratio reduced a further 10 basis points to 40.8%.

CBA has been selective in its home loan growth, with more new loans via proprietary channels, and lower volumes of investor loans than the market.

There was a 6 basis point uplift in net interest margin to 2.16% (and a lift of more than 10 basis points in Australian Retail Banking, thanks to the mortgage book repricing).

Consumer arrears look contained, though WA home loans still above the average.

The Board determined an interim dividend of $2.00 per share, a 1 cent increase on the 2017 interim dividend.

The interim dividend, which will be fully franked, will be paid on 28 March 2018 with the ex-dividend date being 14 February 2018.

The CET1 ratio is 10.4%, lower than some expected, thanks to provisions, and CBA also flagged that by adopting the AASB9 standard CET1 will fall by around 25 basis points.

Some interesting commentary on the outlook:

Global growth trends are positive overall, as are Australia’s GDP outlook and employment trends. However, we remain wary of the risks of market volatility, particularly as expansionist monetary policy unwinds and interest rates rise. Similarly, low wage growth undermines families’ sense of confidence and wellbeing. As we have been for many years, we remain very much aware of the inevitability of intensified competition in the financial services sector.

But the results are quite a bit more complex given a number of one off adjustments.

CBA’s net profit after tax is disclosed on both a statutory and cash basis. A number of items have been included “above the line”.

  • The Group has provided for a civil penalty in the amount of $375 million (not deductible for tax) re AUSTRAC.
  • A $200 million expense provision was taken for expected costs relating to currently known regulatory, compliance and remediation program costs, including the Financial Services Royal Commission.
  • the sale of 100% of its life insurance businesses in Australia
    (“CommInsure Life”) and New Zealand (“Sovereign”) to AIA Group Limited (“AIA”) for $3.8 billion.

They also made adjustments to underlying performance.

  • 1H17 has been adjusted to exclude a $397 million gain on sale of the Group’s remaining investment in Visa Inc. and a $393 million one-off expense for acceleration of amortisation on certain software assets.
  • the impact of consolidation and equity accounted profits of AHL Holdings Pty Ltd (trading as Aussie Home Loans) has been excluded
  • 1H18 is adjusted to exclude an expense provision which the Group believes to be a reliable estimate of the level of penalty that a Court may impose in the AUSTRAC proceedings.

On this basis, the underlying cost-to-income ratio is 40.8% compared to the reported cash NPAT (continuing operations, including AUSTRAC penalty provision) cost-to-income ratio of 43.9%.

Looking at the divisional performance,  Retail Banking Services has more than 10 million personal and small business customers, a network of ~1,000 branches and more than 3,000 ATMs. More than 6 million customers now use digital channels with a quarter of new accounts opened online, and more than 50% of transactions by value completed digitally. Retail Banking Services cash net profit after tax for the half year ended 31 December 2017 was $2,653 million, an increase of 8% on the prior comparative period. Since 2006, Retail Banking Services have improved customer satisfaction by more than 25%, and has been number one in Roy Morgan Retail MFI customer satisfaction for 45 out of the past 54 months. Net interest income was $4,949 million, an increase of 8% on the prior comparative period. This reflected a higher net interest margin, solid balance growth in home lending and strong growth in transaction deposits. Net interest margin increased 11 basis points, reflecting: Higher home lending margin from repricing of interest only and investor loans, and lower cash basis risk, partly offset by unfavourable portfolio mix, with a shift to fixed home loans, and switching from interest only to principal and interest home loans; and higher deposit margin resulting from repricing and favourable portfolio mix, partly offset by lower cash basis risk; partly offset by the impact of the major bank levy. Other banking income was $955 million, a decrease of 5% on the prior comparative period, thanks to lower interchange rates and lower deposit fee income and removal of ATM withdrawal fees. FTE were 11,555, a decrease of 2% on the prior comparative period, yet operating expenses were $1,775 million, an increase of 2% on the prior comparative period. The operating expense to total banking income ratio was 30.1%, an improvement of 90 basis points on the prior comparative period. Net interest income increased 7% on the prior half, reflecting higher net interest margin, balance growth in home lending and deposits, and three additional calendar days than the prior half. Net interest margin increased 10 basis points, reflecting: higher home lending margin with repricing of interest only and investor loans to manage regulatory limits, and lower cash basis risk; partly offset by unfavourable portfolio mix, with a shift to fixed home loans, and switching from interest only to principal and interest home loans; lower deposit margin resulting from lower cash basis risk, partly offset by repricing; and the impact of the major bank levy. Loan impairment expense was $356 million, an increase of 1% on the prior comparative period. The result was mainly driven by increased home loan and personal loan collective provisions, which include the impact of slightly higher home loan arrears, predominately in Western Australia. Home loan growth up 5% driven by strong growth in the proprietary channel leading to an increase in the proprietary flows mix from 57% to 64%; Total deposit growth of 4%, driven by strong growth in Transaction accounts; and  Consumer finance balance decrease of 1%, broadly in line with system.

Business and Private Banking cash net profit after tax for the half year ended 31 December 2017 was $960 million, an increase of 9% on the prior comparative period. Net interest income was $1,694 million, an increase of 5% on the prior comparative period. This was driven by strong deposit balances growth, subdued growth in lending balances and an increase in net interest margin. Net interest margin increased six basis points. Other banking income was $517 million, an increase of 6%. Operating expenses were $789 million, flat on the prior comparative period. FTE were 3,557 up 1% primarily due to an increase in frontline bankers and project resources supporting the Bankwest east coast business banking transition. The operating expense to total banking income ratio was 35.7%, an improvement of 180 basis points on the prior comparative period. Loan impairment expense was $49 million, a decrease of 11% on the prior comparative period. Deposit growth of 6%, driven by strong demand for transaction deposits; home loan growth of 2%, driven by growth in owner occupied loans; and business lending growth of 1% driven by growth in target industries partly offset by decline in residential property development. Loan impairment expense was $49 million, an increase of $42 million on the prior half reflecting higher collective provisions, partly offset by lower individual provisions.

Institutional Banking and Markets cash net profit after tax for the half year ended 31 December 2017 was $591 million, a decrease of 13% on the prior comparative period. Net interest income was $737 million, a decrease of 4% on the prior comparative period. Other banking income was $679 million, a decrease of 6% on the prior comparative period. Operating expenses were $542 million, a decrease of 2% on the prior comparative period. The decrease was driven by the ongoing realisation of productivity benefits, partly offset by higher project, risk and compliance costs. The operating expense to total banking income ratio was 38.3%, an increase of 130 basis points on the prior comparative period. FTE were 1,510, an increase of 4% primarily due to growth in project related FTE and increased risk and compliance resourcing. Loan impairment expense was $105 million, an increase of $61 million on the prior comparative period. Asset quality of the portfolio has remained stable with the percentage of the book rated as investment grade increasing slightly by 40 basis points to 86.0%. Net interest income decreased 2% on the prior half, driven by lower margins, partly offset by average deposit balance growth. Net interest margin decreased seven basis points. Other banking income increased 8% on the prior half. Loan impairment expense increased $85 million on the prior half reflecting higher individual and collective provisions, partly offset by higher write-backs.

Wealth Management cash net profit after tax for the half year ended 31 December 2017 was $375 million, a 51% increase on the prior comparative period. Excluding the contribution from the CommInsure Life Business (discontinued operations), cash net profit after tax was $281 million, a 33% increase on the prior comparative period. The result was driven by strong growth in funds management income and lower operating expenses partly offset by lower insurance income. Funds management income was $987 million, an increase of 10% on the prior comparative period. Average Assets Under Management (AUM) increased 9% to $220 billion reflecting higher investment markets partly offset by higher net outflows in the emerging market equities and fixed income businesses. AUM margins declined reflecting investment mix shift to lower margin products. General insurance income was $82 million, a decrease of 24% on the prior comparative period due to higher weather event claims, partly offset by growth in premiums driven by pricing initiatives. Operating expenses were $707 million, a decrease of 3% on the prior comparative period. This was driven by ongoing realisation of productivity benefits partly offset by continued investment in business capabilities. FTEs were 3,534, a decrease of 11% on the prior comparative period. The operating expenses to total operating income ratio was 66.1%, an improvement of 610 basis points on the prior comparative period.

New Zealand cash net profit after tax for the half year ended 31 December 2017 was NZD589 million, an increase of 15% on the prior comparative period, driven by strong volume growth, improved lending margins, lower loan impairment expense and 20% increase in Sovereign’s profit. ASB cash net profit after tax for the half year ended 31 December 2017 was NZD575 million, an increase of 15% on the prior comparative period. The result was driven by operating income growth and a lower loan impairment expense, partly offset by higher operating expenses. Net interest income was NZD984 million, an increase of 8% on the prior comparative period, driven by strong volume growth and improved net interest margin. Net interest margin increased, reflecting an increase in lending margins, partly offset by an unfavourable retail deposit mix shift to lower margin investment deposit accounts. Other banking income was NZD212 million, an increase of 5% on the prior comparative period, primarily driven by higher card income and insurance commissions, partly offset by lower service fees as customers leverage digital channels. Funds management income was NZD55 million, an increase of 17% on the prior comparative period, due to strong net flows and market performance. Operating expenses were NZD427 million, an increase of 3% on the prior comparative period. This increase was driven by higher staff costs, continued investment in technology capabilities and higher regulatory compliance costs, partly offset by lower property costs and lower depreciation. FTE were 4,826, up 3% primarily due to an increase in frontline and compliance staff, partly offset by productivity initiatives. The operating expense to total operating income ratio for ASB was 34.1%, an improvement of 160 basis points, reflecting improved operating leverage supported by cost control and a continued focus on productivity.
Loan impairment expense was NZD26 million, a decrease of 47% on the prior comparative period, primarily due to lower provisions in the dairy portfolio. Home loan and consumer finance arrears rates continue to remain low at 12 basis points and 50 basis points respectively. This is despite a 12 basis point increase in consumer finance arrears on the prior comparative period primarily driven by the timing of write-offs. Balance Sheet growth included: home loan growth of 5%, marginally below system; strong business and rural loan growth of 8%, remaining above system, with the long-term strategic focus on this segment continuing to deliver strong results; and strong customer deposit growth of 7% in a competitive retail funding environment. Risk weighted assets increased 1%, primarily driven by lending volume growth, partly offset by improved credit quality in the business and rural portfolios.

Bankwest cash net profit after tax for the half year ended 31 December 2017 was $339 million, an increase of 17% on the prior comparative period. The result was primarily driven by strong growth in total banking income, lower loan impairment expense and flat operating expenses. Net interest income was $778 million, an increase of 6% on the prior comparative period. The result was driven by strong balance growth in home lending and deposits, and a higher net interest margin. Other banking income was $107 million, an increase of 7% on the prior comparative period, reflecting an increase in fee based package offerings, partly offset by lower business lending fees. Operating expenses were $368 million, flat on the prior comparative period, reflecting a continued focus on productivity and disciplined expense  management. FTE were 2,866, up 2% on the prior comparative period as a result of increased investment in customer facing technology platforms. The operating expense to total banking income ratio was 41.6%, an improvement of 250 basis points compared to the prior comparative period. Loan impairment expense was $30 million, a decrease of 40% on the prior comparative period. This was driven by reduced home loan impairments and lower business loan collective provisions. Home loan arrears increased in line with the softening Western Australian economy. Balance sheet growth included: home loan growth of 6%, slightly lower than system reflecting the Western Australian economy lagging national growth rates; total deposit growth of 11% resulting from strong growth in Investment and Transaction deposits, reflecting a continued focus on deepening customer relationships; and core business lending growth of 6%. Risk weighted assets increased by 18% on the prior comparative period driven by regulatory changes to the home loan risk weighting. The underlying increase excluding regulatory changes was 10% driven by volume growth in business and home loans and an increase in Operational Risk.