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BFCSA: Bank compensation costs could hit $10b

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Bank compensation costs could hit $10b

Australian Financial Review May 14, 2019 12.07am

James Eyers

 

Commonwealth Bank of Australia's surprise $714 million in new customer compensation costs – taking its bill so far to $2.17 billion – shows the banking and wealth sector is far from settling its massive task of repaying customers.

The price Australia's biggest banks must pay for years of misconduct in compensation to customers and increased spending on risk and compliance could hit $10 billion, according to veteran banking analyst Brett Le Mesurier.

His estimate covers the big four banks and AMP and includes the costs of the Hayne royal commission and regulatory fines.

One of the most glaring examples of these scandals – laid bare by the royal commission – was the practice of charging advice fees without providing services.

At a briefing after a disappointing third-quarter trading result sent the CBA share price falling, chief executive Matt Comyn said the bank was "engaging with greater frequency with our regulators across a range of matters, and working to ensure these are dealt with as efficiently and as comprehensively as possible".

When CBA's fine for anti-money laundering breaches is included, its bill for wrongdoing is approaching $3 billion, and the total misconduct cost across the major banks and AMP is currently about $9 billion, said Mr Le Mesurier, a senior banking analyst at Shaw and Partners.

"By the time this disaster is over, we won’t be far short of $10 billion," he said.

CBA said provisions for wrongdoing by "aligned" advisers (who work for parts of the CBA network but are not bank employees) represented $24 in every $100 of ongoing service fees collected for a decade up to 2018.

For CBA's salaried advisers, the refunds represent $22 out of every $100. The bank expects to repay between $200 million and $500 million this financial year, depending on the final terms of the agreement with aligned advisers.

Mr Comyn said while the final numbers might ultimately edge higher, "we feel we are adequately provided for currently known banking and wealth customer remediation. Our priority is to get refunds back in the hands of our customers."

'A high water mark'

Westpac Banking Corp's customer repayments represent an even larger proportion of overall fees.

It said just before its half-year results this month provisions for refunds for the misconduct of its "authorised representatives" represent $31 in every $100, and an estimated $28 in every $100 for its salaried planners.

"Westpac has now taken more expansive provisions relative to peers in relation to advice," Citi banking analyst Brendan Sproules said.

"We estimate Westpac has provided for around 37 per cent of total advice fees across salaried and aligned advisers over the past decade including interest – representing a high water mark in the industry."

Investment spending in the big four banks has been "repositioned and refocused on risk and compliance projects as a result of the findings from the royal commission, APRA prudential inquiry into CBA and the AUSTRAC case against CBA on financial crimes,"  KPMG says.

Big bank spending on risk and compliance initiatives increased from 29 per cent of total investment spending in the first half of 2018, to 40 per cent in the first half of 2019.

Eating into growth

KPMG says this has pushed down spending on productivity and growth investment projects on both an absolute and a relative basis.

CBA has 400 staff working on its compensation projects and said on Monday out of the $2.17 billion in total remediation costs, $806 million, or 37 per cent, were the costs of running the program itself, plus the costs of implementing the 76 recommendations of the Hayne royal commission.

NAB has 500 staff working on remediation projects. Just before Easter, it said its first-half earnings would be reduced by $749 million due to growing customer remediation costs. At its result on May 2, NAB cut its dividend in response.

Westpac said just before its results it would take an additional $510 million hit and said it expected compensation costs could rise. Of this, $75 million, or 15 per cent, represents remediation program costs. The compensation costs helped force its interim profit down by 22 per cent.

ANZ Bank has announced remediation costs of $907 million.

"First-half reporting was tarred by the stain of remediation," Mr Sproules said.

"The major banks reported one of the noisiest reporting seasons to our recollection, marred by the announcement of $2 billion in predominantly wealth remediation provisions."

CBA said on Monday unaudited cash earnings for the quarter to March 31 were down 28 per cent to $1.7 billion, missing expectations and sending the shares down 2.5 per cent to $73.50 at the close of trading. CBA's slide dragged the rest of the banking sector down with it.

"The share price reactions today indicate there's still room for bank stocks to respond to bad news," Mr Le Mesurier said.

CBA said it was delivering on all 156 "milestones" set out in its remedial action plan with APRA and was dealing with ASIC's enforceable undertakings.

It also said it was "engaging with regulators on large improvement programs for data management and privacy" and working "with applicable regulators [and] stakeholders" to resolve "discrepancies" in employee arrangements and entitlements.

According to KPMG's analysis of the major bank results, lower revenue, rising regulatory costs and ongoing customer remediation depressed return on equity by 88 basis points from the first half of 2018, to an average ROE of 12 per cent.

CBA said on Monday it was prepared for remediation bills to rise.

"Regulatory actions, including potential enforcement actions, or policy changes may negatively impact the bank’s financial position or standing," it said in the update. "There [is] a range of matters where the outcome and any associated costs cannot be reliably estimated, therefore these matters are treated as contingent liabilities."

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