Tag: CBA

CBA Updates Divestment of Australian Life Insurance Business

Commonwealth Bank of Australia (CBA) has announced that it has entered into further agreements to progress the planned divestment of its Australian life insurance business (CommInsure Life) to AIA Group Limited (AIA).

The planned divestment has been subject to ongoing regulatory approval processes, which has led to an extended period of uncertainty for CommInsure Life.

The revised transaction path comprises a joint co-operation agreement, reinsurance arrangements, partnership milestone payments and a statutory asset transfer. The aggregate proceeds for CBA from the transaction are expected to be $2,375m,[1] a reduction of $150m from the original sale price. These arrangements are expected to be implemented in a staged manner throughout FY20, with CBA to receive approximately $750 million of proceeds and distributions by the end of 1H FY20 and the remaining $1,625 million by the end of FY20.

CBA and ASB have also agreed to grant AIA an option to extend the respective Australian and New Zealand distribution agreements from 20 years to 25 years.

CBA Chief Executive Officer Matt Comyn said: “Today’s announcement provides CommInsure Life’s policyholders and staff with more clarity about the future of the business and progresses the simplification of CBA’s portfolio of businesses.

“We are excited by the opportunity to bring together the strengths of AIA and CommInsure Life and are working hard with our partner to develop a new generation of products for CBA’s customers, which will deliver excellent customer outcomes”.

The revised transaction path is subject to a number of Australian regulatory approvals, the entry into reinsurance arrangements and life insurance entity board approvals.

Details of the revised transaction path

The revised transaction path comprises the following key components:

Joint co-operation agreement

  • CBA and AIA will enter into a joint co-operation agreement, which once implemented, will result in the full economic interests associated with CommInsure Life (excluding in relation to the Group’s 37.5% equity interest in BoCommLife Insurance Company Limited (BoCommLife)) being transferred to AIA and AIA obtaining an appropriate level of direct management and oversight of the business. AIA Australia & New Zealand CEO Damien Mu will lead CommInsure Life under these arrangements.
  • Implementation of the joint co-operation agreement is expected before the end of 1H FY20 (Implementation Date), at which time CBA will receive an upfront payment of $500 million.

Reinsurance

  • Colonial Mutual Life Assurance Society Limited (CMLA), the key life insurance entity of CommInsure Life, intends to enter into a reinsurance arrangement with a leading global reinsurer.
  • The reinsurance arrangement would come into effect on the Implementation Date and is expected to result in CBA receiving a distribution from CMLA of approximately $200 million shortly following the Implementation Date.

Partnership milestones

  • CBA will receive four partnership milestone payments of $50 million each ($200 million in aggregate), to reflect the progress in the partnership, with the first payment expected to be received in late 1H FY20.

Completion

  • In parallel with the planned share sale of CommInsure Life (which remains subject to a foreign regulatory approval process), CBA and AIA are progressing a potential statutory asset transfer as an alternative approach to completing the divestment of the business. If implemented, the statutory asset transfer would be expected to take approximately 9 months to implement.
  • Upon completion, whether achieved through a share sale or statutory asset transfer, CBA will receive a final payment from AIA of approximately $1,475 million (subject to completion adjustments).

Financial impacts

Upon completion, which is expected to occur by the end of FY20, the revised transaction path is expected to have released approximately $1.6 billion – $1.8 billion of Common Equity Tier 1 (CET1) capital, resulting in a pro forma increase to the Group’s CET1 ratio of approximately 35 – 40 basis points on an APRA basis as at 30 June 2019.

Sale of equity interest in BoCommLife

CBA remains committed to completing the sale of the Group’s 37.5% equity interest in BoCommLife to MS&AD Insurance Group Holdings. Completion of the sale of the BoCommLife equity interest remains subject to regulatory approval from the China Banking and Insurance Regulatory Commission (CBIRC) and CBA is working constructively with CBIRC in relation to the process. For the avoidance of doubt, the revised transaction path in relation to CommInsure Life does not impact this sale process and CBA will continue to exercise full control over the BoCommLife equity interest until its sale has been completed.

[1] Subject to completion adjustments.

CBA Drops Profit 8.1%

CBA reported an 8.1% drop in profit over fiscal year 2019 in its full year results released this morning.

Commonwealth Bank’s (CBA) FY19 net profit was $8.6bn as compared to $9.4bn the year preceding. NIM looks under pressure ahead (thanks to lower cash rates) and non-performing loans are on the rise. The mortgage business may offer some support ahead.

CEO Matt Comyn partially attributed the “subdued” result to higher remediation costs totalling $2.2bn in FY19, up $1bn from the year before.

He said, “While this year’s headline results were impacted by customer remediation costs, revenue forgone for the benefit of customers and elevated risk and compliance expenses, our core business continued to perform well – underpinned by growth in home lending, business lending and deposits.”

“Our home lending balances are up 4%, which is above the system. Our business lending is also up 4% and we’ve continued to see strong transaction deposit growth of 9% for the year.”

Owner-occupied loans made up 71% of new lending in FY19.

Comyn also provided an update on the implementation of the recommendations from the royal commission.

“We’ve already completed six of the recommendations and we’re going to make sure we complete at least another eight before the end of the calendar year, taking the total to 14 of the 23 that we can implement by ourselves,” he said.

“Specifically in the result, we call out $275m of revenue that’s been forgone by deliberate choices that we’ve made to make sure we’re delivering better outcomes for our customers.”

The bank also gave an update on the suspended demerger of its wealth management and mortgage broking businesses, communicating it intends to cease providing licensee services through Financial Wisdom by June 2020 at which point it will proceed with an assisted closure.

When first announced, the demerged business – CFS Group – was to include CBA’s Colonial First State, Colonial First State Global Asset Management (CFSGAM), Count Financial, Financial Wisdom and Aussie Home Loans businesses.

In the subsequent months, CFSGAM and Count Financial have both been sold or are currently in the process of being sold separately.

In today’s release, CBA reiterated that it’s “committed to the orderly exit of its remaining wealth management and mortgage broking businesses,” comprising Colonial First State, Aussie Home Loans and CBA’s 16% stake in Mortgage Choice. From Australian Broker.

CBA Offers Enforceable Undertaking Relating To Customer Personal Information

The Australian Information Commissioner (Commissioner) has accepted an Enforceable Undertaking (EU) offered by Commonwealth Bank of Australia (CBA).

The EU underpins execution of further enhancements to the management and retention of customer personal information within CBA and certain of its subsidiaries.

The EU follows CBA’s ongoing work to address two incidents; one relating to the disposal of magnetic data tapes containing historical customer statements; and the other relating to internal user access to certain systems and applications containing customer personal information. CBA reported both incidents to the Office of the Australian Information Commissioner (OAIC) in 2016 and 2018 respectively and has since been working to address these incidents.

As previously announced, CBA has found no evidence to date, as a result of these incidents, that our customers’ personal information was compromised, or that there have been any instances of unauthorised access by CBA employees or third parties.

CBA’s commitments in the EU announced today include reviewing and implementing further enhancements to:

  • internal privacy policies, procedures and record retention standards;
  • internal user access controls on systems and applications that hold personal information; and
  • the privacy risk management and monitoring processes that apply to service providers to CBA and certain subsidiaries.

The EU provides CBA with 90 days to develop and submit to the OAIC a work plan, and timetable of work that CBA will complete to meet its obligations under the EU.

Commonwealth Bank Group Chief Risk Officer, Nigel Williams, said: “We have offered this EU as a demonstration of our continued commitment to appropriately managing the privacy of customer personal information, and addressing any concerns identified by the Commissioner.

“We continue to take action to address issues, earn trust and be a better bank for our customers. This includes proactively engaging with our regulators to ensure we continue to build better systems, processes and controls to manage the personal information of our customers.”

Further information regarding this EU is available online at www.commbank.com.au/privacyupdate

CBA Sells Count Financial; Holds $200m Indemnity Risks

CBA has today entered into an agreement to sell Count Financial Limited to ASX-listed CountPlus Limited.

Commonwealth Bank of Australia (CBA) has today entered into an agreement to sell Count Financial Limited (Count Financial) to ASX-listed CountPlus Limited (CountPlus) for $2.5 million (the Transaction). CountPlus is a logical owner of Count Financial given its historical corporate relationship and equity holdings in 15 Count Financial member firms.

CBA will continue to support and manage customer remediation matters arising from past issues at Count Financial, including after completion of the Transaction. CBA will provide an indemnity to CountPlus of $200 million and all claims under the indemnity must be notified to CBA within 4 years of completion. This indemnity amount represents a potential contingent liability of $56 million in excess of the previously disclosed customer remediation provisions that CBA has made in relation to Count Financial of $144 million (which formed part of the remediation provisions announced in the 3Q19 Trading Update). CBA has already provided for the program costs associated with these remediation activities.

The Transaction is subject to a CountPlus shareholder vote to be held in August 2019 and completion is expected to occur in October 2019. The Transaction is not expected to have a material impact on the Group’s net profit after tax.

CBA currently owns a 35.9% shareholding in CountPlus and intends, subject to market conditions, to sell its shareholding in an orderly manner over time following completion of the Transaction. 

From a financial perspective, the Transaction will result in CBA exiting a business that, in FY19, is estimated to incur a post-tax loss of approximately $13 million.

Implications for NewCo

Following completion of the Transaction, NewCo will comprise Colonial First State, Financial Wisdom, Aussie Home Loans and CBA’s 16% stake in Mortgage Choice. Consistent with the announcement in March 2019, CBA remains committed to the exit of these businesses over time. The current focus is on continuing to implement the recommendations from the Royal Commission and ensuring CBA puts things right by its customers.

CBA reports post-election spike in mortgage applications

The number of home loan applications received by the major bank in the week following the federal election hit a six-month high, according to CEO Matt Comyn, via The Adviser.

Following his address to the Trans-Tasman Business Circle, CEO of the Commonwealth Bank of Australia (CBA) Matt Comyn revealed that the bank experienced a surge in home loan applications via both the proprietary and broker channel following the Coalition government’s election victory.  

“I think, in particular at the moment, quite rightly, there is a strong interest in property,” Mr Comyn said.

“We did have the strongest week in applications that we have seen in more than six months. It did feel – certainly from a demand perspective – there is quite a shift in sentiment.”

The election outcome signalled the defeat of the Labor opposition’s proposed changes to negative gearing and the capital gains tax, which some observers feared would further dampen sentiment in the housing market.  

Expectations of a rate cut from the Reserve Bank of Australia (RBA) also heightened following the election, after governor Philip Lowe conceded that the central bank would “consider the case for a rate cut” in June.

Mr Comyn said the bank has revised its monetary policy forecast and now expects an imminent rate cut from the RBA; however, Mr Comyn downplayed its contribution to lifting market sentiment. 

“It has an effect but there are other things that have a higher impact,” Mr Comyn added.

“Fiscal stimulus, cuts to taxes, and increases in sentiment tend to have a much bigger transmission effect to the broader economy.”

Further, commenting on the fall in home values, Mr Comyn said that the correction is an overall positive for the broader economy.

“It’s painful for anyone who owns a house and sees the value of their asset or any asset reduce, but I do think it’s a good thing,” he said.

“It’s in the interests of long-term financial stability.”

CBA launches new ‘green mortgage’

During his address, Mr Comyn unveiled a new “green mortgage” initiative, designed to reward “energy-efficient” mortgage holders.  

Mr Comyn said CBA plans to pass on the benefits of continued demand for green bonds from investors, by offering $500 cashbacks to mortgage holders who have solar panels installed in their homes.

Commenting on the announcement, Daniel Huggins, CBA’s executive general manager, home buying, said: “We are always looking for innovative ways to support our customers, which is why we are launching this new initiative.”

He added: “We understand many of our home loan customers could reduce their energy volume and usage and pay less or become net positive for energy by investing in energy efficient devices.”

Mr Huggins said the bank is in the process of introducing other initiatives to encourage home owners to make “greener choices”.

“We want to support more of our customers who wish to install small scale renewables by reducing their installation costs and payback periods,” Mr Huggins added.

CBA stated that the green mortgage initiative will be formally launched in the coming weeks.

CBA Ups Provisions And Reports Margin Squeeze

CBA released their quarter update to 31 March 2019. Its an unaudited summary. Its weak, and confirms the trends we saw elsewhere. Customer remediation is costing them dear. CBA shares dropped.

They announced an unaudited statutory net profit of $1.75 billion and a cash net profit of $1.70 billion. Headline profit was impacted by $714 million in pre-tax additional customer remediation which translates to $500 million post-tax.

Customer remediation on a cumulative basis now stands at $2.17 billion, an astonishing amount.

They provided a breakout. Fee for no service and costs of the remediation programmes were the largest items. $374m is included for customer refunds – including $123 million of interest and assumes a refund rate of 24% excluding interest of the ongoing service fee costs from FY09-FY18.

Operating income was 4% lower, thanks to a range of factors, including seasonal factors, “temporary headwinds” including unfavorable derivative valuation adjustments and weather events), and re-based fee income.

Net interest income was down 3% (due to fewer days in the quarter). The Group’s net interest margin fell “slightly”. Non-interest income was 10% lower, thanks to some “Better Customer Outcomes” initiatives. Income foregone is $415 million, of which $275 million will be recognised in 2019.

Operating expenses rose 1% excluding notable items, of 24% including the additional customer remediation.

Loan impairment expenses was $314 million in the quarter or 17 basis points of Gross Loans And Acceptances, compared with 15 basis points in 1H19. This includes higher levels of consumer arrears and corporate impaired assets.

Consumer arrears are conveniently attributed to “seasonal factors”, as well as a rising trend, thanks to subdued levels of income growth and cost of living challenges, most evident in the outer metro areas of Perth, Melbourne and Sydney.

Accounts in negative equity are more than 3% of total accounts, based on 31 March 2019 (so higher now). Around three quarters of the negative equity relates to WA and QLD.

Troublesome and impaired assets rose to $7.2 billion. There are emerging signs of weakness in discretionary retail and drought-affected farmers and communities, including some named corporates, and home loan customers experiencing hardship.

Total provisions were increased by $96 million to around $4.8 billion dollar, and collective provisions were also lifted.

The banks ratios were pretty strong.

But the CET1 ratio fell from 10.8% to 10.3%., after the impact of dividend payments.

We expect to see more pressure on the sector ahead.

Mortgage Price War Hots Up

The recent fall in the BBSW has offered a window of opportunity for CBA and Westpac, the two mortgage behemoths to cut fixed rates.

This will put more pressure on smaller players (see BOQ yesterday) and likely trim some deposit rates as pressure on margins accelerates.

This from Australian Broker.

Just days after CBA announced it was cutting its rates and stepping away from its competitors, another big four has matched the changes across the board – and likely triggered a continued decrease in fixed rates at lenders of all sizes.

The newly announced decreases go into effect at Westpac tomorrow for fixed rate loans paying P&I and are open to both new and existing customers switching into a fixed rate.

“As expected, it hasn’t taken Westpac long to match the fixed rate cuts this week from Commonwealth Bank,” said Steve Mickenbecker, Canstar group executive of financial services.

“These decreases are a further sign that the big banks are wanting to fight back to regain the market share losses to the local arms of foreign banks and other domestic lenders over the past 12-months.”

At Westpac, the three- and five-year fixed rates for owner occupiers paying P&I are to decrease by 0.10% while the four-year rate will drop by 0.20%.

Fixed rates will also decrease for investors paying P&I, by 0.06% for two-year, 0.20% for three-year, and 0.10% for five-year, demonstrating “the bank’s desire to increase investment lending in the face of declining demand,” according to Mickenbecker.

Other lenders have already been making moves of their own to stay competitive.

Suncorp has announced a discount for its three-year fixed package rates for eligible new home lending, meaning the non-major currently has the lowest three-year fixed rate in the market at 3.49% for owner occupied and 3.69% for investment.

“We are now eagerly awaiting the response from the other two major banks and the rest of the market, in light of these competitive fixed rates from the country’s two biggest lenders,” concluded Mickenbecker.

Are CBA Demerger Plans On Hold “indefinitely”?

Yesterday, CBA announced it was suspending the demerger of its wealth management and mortgage broking businesses slated to occur this calendar year, in order to better address the recommendations from the royal commission; via Australian Broker.

Following the news, Daniel John, head of group public affairs and communications at Commonwealth Bank (CBA), provided further clarification to Australian Broker on the “pragmatic and realistic” decision to halt the split.

He explained, “The reason we didn’t give a timescale is there’s a degree of uncertainty out there, especially coming off the royal commission.

“It’s very much on hold. Whether it would happen in 2020 or 2021 is very difficult to predict. We don’t want to get to the point where we’re making another announcement in six months’ time saying we’ve put it off again.”

John reaffirmed the bank’s commitment to the demerger but acknowledged that “it could be revised.”  

To illustrate his point, he cited the sale of Colonial First State Global Asset Management (CFSGAM) to Mitsubishi UFJ Trust and Banking Corporation last year. The total cash consideration of the transaction was $4.13bn, and CFSGAM was pulled from the entities included in the scheduled demerger.

John said that the bank would be “duty bound by our shareholders and customers” to give real consideration to such “a definitive and attractive” offer.

However, a statement from Aussie Home Loans said the suspension of preparations around the demerger is “indefinite”.

The CBA-owned brokerage currently operates 225 franchise stores and counts more than 1,000 brokers in its network.

According to CEO James Symond, CBA’s announcement “doesn’t impact [Aussie’s] focus on [its] customers, brokers and team members”.

“We remain fiercely independent in our operations and approach to providing outstanding customer outcomes and it is worth noting that 66% of the loans provided by Aussie in 2018 were with lenders outside of the big four banks.

“We will continue working on our strategy towards building a safer and stronger Aussie,” he added.

Several months ago, CBA announced that Jason Yetton and Andrew Morgan were to head the new wealth management and mortgage broking entity NewCo, as CEO and CFO respectively.

“At the moment, nothing has changed in regards to Jason’s or Andrew’s position because we’ve still got to manage those businesses. For the time being, they’ve still got roles to play in making sure that we run those businesses for the benefit of the consumers, customers, and shareholders,” said Daniel John.

CBA To Still Exit Mortgage Broking And Wealth Management Businesses

The Commonwealth Bank has provided an update on its business plans and has said it is committed to the exit of its wealth management and mortgage broking businesses; via InvestorDaily.

The update follows last week’s release of the bank’s full response to implementing the recommendations from the Royal Commission. 

While CBA remains committed to exiting the wealth management and mortgage broking business it has suspended these plans in order to focus on the priorities of refunding customers and remediating past issues. 

Over recent years, the bank has spent $1.46 billion on or provisioned to address refunding customers including $1.21 billion relating to the wealth management business. 

The $1.46 billion comprises of over $600 million already paid to customers or provisioned to address issues relating to advice quality, fees for no service and banking fees and interest.

The program costs and processes of this work has cost the bank $650 million and another $200 million has been provisioned for wealth management related remediation issues and program costs, including ongoing service fees charged by aligned advisors. 

Editors note: Post updated from millions to billions (source was incorrect).

CBA 1H Results Shows Margin Pressure, But Strong Capital

CBA released their IH19 results today and reported a statutory net profit after tax (NPAT) including discontinued operations of $4,599 million, down 6.3% on 1H18, but 4% up on 2H18. We see signs of stress in higher consumer loan defaults and margin pressure despite higher capital ratios. Its going to interesting to see how the other banks perform – generally CBA does better than some of its peers. They reported a drop in mortgage borrowing power of more than 15% compared with 2015, thanks to tighter standards.

Cash NPAT from continuing operations was $4,676 million, up 1.7% on IH18.

ROE was 13.8% (continuous operations), was down 40 basis points on prior comparative period (pcp).

Operating income of $12,408 million, down 1.9%, with volume growth offset by lower net interest margin, lower Markets and fee income, and the impact of weather events.

Trading income dropped from $556 million 1H18 to $494 million 1H19.

Expenses were down 4.5%, helped by one offs.

The cost to income ratio was 42.6%, down 60 basis points on pcp.

Net interest margin of 2.10%, 4 basis points lower than 2H18, due to higher funding costs and home loan switching and competition. The pressure was from higher funding, basis, discounting and offset by deposit repricing. Retail Banking margin fell from 277 1H18, to 260 basis points in 1H19, driven by higher funding costs and home loan margin pressures.

Operating expenses of $5,289 million, a reduction of 3.1%, with elevated risk, compliance and remediation costs offset by prior period one-offs.

Home lending in Australia grew at 3.5% in total, with investment loans at 0.1%, and at 0.9 times system growth in 1H19. They had less reliance on mortgage brokers. They have increased loan underwriting standards significantly.

Borrowing capacity has dropped by around 15% on average, compared with 2015. Current serviceability tests include an interest rate buffer of 2.25% above the customer rate, with a minimum floor rate of 7.25%

Standards are higher now.

Mortgage arrears are rising, with WA and NT leading the way.

A severe stress test scenario is modelled on an ongoing basis. Scenario includes stresses to house prices (31% decline), unemployment (11%), cash rates (reduced to 0.5%). Losses are estimated over three years: Gross 3-year losses of $3.85b, or $3.06b net of insurance.

21% are insured with Genworth or QBE.

Consumer debt is also under pressure.

Loan impairment expense of $577 million, equivalent to 15 basis points of average gross loans and acceptances annualised, down from 16 basis points.

Funding costs continue to rise, as expected.

Every 5 basis points of basis risk equates to 1 basis point of net interest margin.

Effective tax rate of 28.5%, expected to rise to approximately 29% for FY19. Interim dividend per share flat at $2.00. The Dividend Reinvestment Plan is anticipated to be satisfied in full by an on-market purchase of shares.

Earnings per share (cash basic) of 265.2 cents, an increase of 0.9 cents per share. Return on equity (cash) of 13.8%, down 40 basis points.

Common Equity Tier 1 (CET1) capital ratio on an APRA basis of 10.8%, up from 10.1% as at June 2018.