CBA's impressive FY17 result marred by AUSTRAC case

Glenn Freeman | 11/08/2017

Page 1 of 1

David Ellis: The Commonwealth Bank's result for the 2017 financial year was strong. It was a typical Commonwealth Bank result: clean, solid and big. Profit was $9.8 billion, so just under $10 billion, which was a good outcome, a little bit above consensus.

Also, the dividend was a little bit of a surprise. Total dividend of $4.29 for the year. I was expecting $4.25, so a little bit better.

But looking at the profit and loss statement and the balance sheet, pretty much all key metrics, key data points, were solid and good. It was hard to fault really. We had relatively good volume growth, so deposits up 8 per cent, loans up 5 per cent.

We had margins just down a touch, not too bad. And we had cost to income ratio improving further. And most importantly, the return on equity was 16 per cent. Now, 16 per cent is a good number, but flat on 2016. And most global banks would kill for a return on equity of around 16 per cent, so good solid result. Dividend payout ratio is 75 per cent. We expect that payout ratio will decline over the next five years or so.

And another key outcome was the capital. So, the bank is well-capitalised. The key ratio was just over 10 per cent.

APRA requires banks, the major banks, to have a minimum common equity Tier 1 ratio of 10.5 per cent by January 2020. So, Commonwealth Bank is well-placed to generate capital organically to meet those higher requirements. So, a solid, clean and big result, and bodes well for profitability in the next few years.

Well, the AUSTRAC court case and the outfall from it completely overshadowed the high-quality financial result, which is a big shame.

So, there's still a lot of uncertainty about how it's going to unfold and any consequences for senior management. We believe that there's significant reputational damage caused by the Commonwealth Bank's actions and the AUSTRAC case and it will probably take a number of years really to recover, I think, from that reputational damage.

Just prior to the result we downgraded the stewardship rating for Commonwealth Bank from Exemplary to Standard, due to the management missteps, or management shortcomings, apparent from the allegations made by AUSTRAC.

This report appeared on www.morningstar.com.au 2017 Morningstar Australasia Pty Limited

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written content of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.