Commonwealth Bank expected to recover

The Commonwealth Bank of Australia will recover from a record fine. Photo: Reuters
The Commonwealth Bank of Australia will recover from a record fine. Photo: Reuters
The Commonwealth Bank of Australia (CBA) is still finding favour with analysts despite having to pay a record fine to settle civil proceedings.

CBA paid $A700 million ($NZ761.4 million) to settle the civil proceedings raised by the Australian Federal Government’s anti-money laundering agency, the Australian Transaction Reports and Analysis Centre.

Morningstar analyst David Ellis said the resolution of the case removed some earnings uncertainty with a specified financial outcome.

As part of the agreement, CBA admitted to allegations including the late submission of 53,506 threshold transaction reports for cash deposits, inadequate adherence to risk assessment requirements, transaction monitoring issues, inappropriate filing, and breaching customer due-diligence requirements.

CBA also admitted further contraventions of Australia’s Anti-Money Laundering and Counter-Terrorism Act.

"We believe CBA has to ensure future compliance of all legal and regulatory requirements is achieved without compromise, as well as other banks which were recently under regulatory spotlight."

Morningstar’s fair value estimate remained at A83c per share and earnings assumptions were unchanged. At current share prices, the stock was undervalued, trading 16% below valuation.

CBA, the owner of ASB in New Zealand, would recognise a provision of $A700 million for its full-year 2018 financial year, nearly doubling its previous estimates of $A375 million in its first-half result.

The financial impact of the provision was immaterial to the total valuation of the $A123 billion market capitalisation.

The reputation of the bank and senior management had been under pressure. The stock price had fallen 14% since August 4, 2017, wiping off about $A18 billion in market capitalisation, Mr Ellis said.

Senior management were accountable for the systems error causing the bulk of the anti-money laundering allegations and subsequent mistakes in dealing with the alleged breaches.

"We believe the bank will navigate through this latest management misstep and continue to benefit from strong competitive advantages."

The bank continued to co-operate with the analysis centre and other law enforcement agencies and continued to invest heavily in improvements to reporting and monitoring.

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