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CBA wealth profit drops, remediation escalates

5 minute read

Commonwealth Bank of Australia has seen its wealth management profit  plunge by 37 per cent in financial year 2019, with the bank casting off its various wealth businesses and their associated customer remediation costs continuing to pile on. 

The group saw its yearly profit and income drop in what chief executive Matt Comyn called a “subdued operating environment.” The group cited lower volumes of initial advice fees as well as the removal of ongoing fees from its financial planning businesses, with around $415 million in income forgone.

CBA alerted the market that it is exiting the last of its financial advice businesses, entering an assisted closure of Financial Wisdom and ceasing CFP Pathways following the $2.5 million sale of Count Financial gaining shareholder approval.

The group’s statutory profit came to $8.3 billion, down by 8 per cent, while cash NPAT was $8.4 billion, dropping by 5 per cent. 

The bank’s total operating income was $24.4 billion, slipping 2 per cent from FY18, while its net interest margin was 2.1 per cent for the year, down five basis points. Funds management income for the group fell by 4 per cent from the prior year, to $1 billion.

The wealth management division generated a cash NPAT of $160 million, decreasing by 37 per cent from the prior year and contributing 2 per cent of the group’s total profit. As well as remediation, CBA cited higher regulatory and compliance costs. 

CBA’s retail bank on the other hand, which includes Commonwealth Financial Planning, generated a cash NPAT of $4.2 billion, down by 12 per cent from FY18. It covered half of the bank’s total profit.

The business and private banking segment’s NPAT fell by 7 per cent to $2.6 billion while institutional banking and markets produced $1 billion, falling by 8 per cent from the prior year.

Cash NPAT from the New Zealand banking and fund management businesses operating under the ASB brand managed to climb by 8 per cent to $1 billion for the year.

Mr Comyn said reducing the bank’s portfolio of businesses and simplifying its operations would allow it to focus on its core banking businesses, which deliver 95 per cent of its profit.

The bank stated simplifying the business had saved it $190 million in FY19.

FY19 remediation close to $1 billion

The group’s total customer remediation, including aligned advice surged to $918 million for the year, a dramatic change from $52 million in FY18. To the end of FY19, the bank had accumulated a total of $2.2 billion in customer remediation costs.

Mr Comyn added the group is planning to pay $100 million more before the end of the year. 

As at 30 June, CBA held a provision of $534 million in relation to aligned advice remediation, including $251 million for customer fee refunds, $123 million for interest in fees subject to refunds and $160 million for costs to implement the remediation program.

Around $358 million was dedicated to risk and compliance programs, such as implementing the royal commission and APRA prudential inquiry recommendations, up from $247 million in FY18. 

“A large team is also working on remediation and we have expensed approximately $1 billion this year to cover refunds, interest and program costs – due primarily to issues in our financial advice businesses – to ensure that customers are appropriately and efficiently remediated,” chairman Catherine Livingstone noted in her message to shareholders.

Total operating expenses for the year came to $11.2 billion.

The estimated pre-tax costs supporting the Financial Wisdom and CFP Pathways businesses, advisers and customers through the transition, as well as other internal project costs, are around $26 million. Both businesses resulted in a post-tax loss of $11 million for FY19, excluding remediation provisions. 

CBA said it will continue to manage customer remediation arising from past issues at Financial Wisdom. 

The bank has washed its hands of aligned advice in response to significant regulatory and structural changes to the sector, in the aftermath of the royal commission.

CBA is still yet to exit the last of its remaining wealth management and mortgage broking businesses as it committed to in March. The last pieces to depart are Colonial First State, Aussie Home Loans and CBA’s 16 per cent stake in Mortgage Choice. 

Last week the $4.2 billion sale of Colonial First State Global Asset Management to Mitsubishi UFG was approved to proceed. 

CBA to exit thermal coal

The bank also has a commitment to reduce its exposure to thermal coal mining and coal-fired power generation, aiming to divest from the sectors by 2030, “subject to Australia having a secure energy platform.”

The move comes after Suncorp and QBE made the same call to eventually depart from thermal coal earlier this year.

CBA said it will only finance new oil, gas or metallurgical coal mining projects if they are demonstrated to be compatible with the goals of the Paris agreement. 

It will also bar providing finance from any mining, exploration or development of oil sands, or from oil and gas exploration and development in the arctic. 

The bank said it is building capabilities across its wealth management businesses to manage climate and broader ESG risks on customers’ behalf, as well as offer new investment solutions.

Colonial First State Investments measures and reports on carbon emissions intensity while newly launched investing app CommSec Pocket gives access to ETHI, an ETF aiming to back climate change leaders.

Commonwealth Bank Group Super and departing CFS Global Asset Management both report their climate governance, strategy, risk management and metrics in line with the Task Force on Climate-related Financial Disclosures.

Sarah Simpkins

Sarah Simpkins

Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth. 

Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio. 

You can contact her on [email protected].