May 8, 2018 / 11:31 PM / 10 months ago

UPDATE 2-Australia's CBA posts Q3 profit fall as compliance burden weighs

* Quarter profits hit by higher regulatory costs and lower revenue

* Lower credit card fees and weaker treasury & trading performance

* Bank admits to “unconscionable conduct” over rate rigging

* Shares fall 3.3 pct in positive market (Recasts, adds share price move, investor and analyst quotes)

By Paulina Duran

SYDNEY, May 9 (Reuters) - Commonwealth Bank of Australia posted a 2 percent fall in quarterly cash profit on Wednesday as customers switched to cheaper mortgages and it wore the costs of fixing its tattered reputation in the wake of a series of scandals.

Australia’s biggest lender also said it would agree to a A$25 million ($19 million) settlement with the corporate regulator over interest rate rigging, in the latest blow to its standing as a pillar of the world’s 12-largest economy.

Rate-rigging is one of many allegations levelled at the 106-year-old bank in recent years, exposing it to potentially massive fines, tighter capital requirements and rising compliance costs.

Australia’s financial sector has been rocked by evidence of widespread wrongdoing exposed by a powerful independent inquiry established by the federal government.

None of Australia’s “Big Four” banks - CBA, Westpac Banking Corp, Australia and New Zealand Banking Group Ltd and National Australia Bank - have emerged with their reputations untarnished, but CBA has so far paid the highest price in terms of compliance costs.

“It does appear that there is a greater regulatory (and) compliance spend burden on CBA relative to its peers,” Morgans banking analyst Azib Khan said, after Fitch Ratings on Monday downgraded its outlook on the lender’s Issuer Default Rating citing mounting compliance risks.

Commonwealth Bank shares plunged more than 3 percent in afternoon trade to their lowest level since Nov. 9 2016, while the broader market was higher. The stock has lost about 16 percent, or A$22.7 billion in market value, since Aug. 3 when authorities accused it of breaching anti-money laundering rules.

Hugh Dive, chief investment officer at Atlas Funds Management which owns bank shares, said the decline in underlying profit looked bad compared with the “very good result” from smaller rival Westpac on Monday.

Unaudited cash earnings for the three months to March 31 fell 2 percent to A$2.35 billion ($1.8 billion) from a year ago, Sydney-based CBA said in a limited trading update.

Operating expenses grew 3 percent over the quarter, driven by higher provisions for regulatory and compliance projects.

The increase in expenses comes on top of the A$575 million provision for fines and regulatory, compliance and remediation programmes the bank recognised in the previous half.

Australia’s banking regulator slugged CBA with an extra A$1 billion capital requirement last week, to be lifted once governance reforms have taken place to address concerns raised by the anti-money laundering breaches.

Net interest margin “declined slightly”, the bank said. Troublesome and impaired assets for the quarter fell to A$6.6 billion, from A$6.7 billion a year earlier, but rose 10 percent over the previous quarter.

Australia’s major banks began hiking mortgage rates last year in response to an imposed cap on interest-only loans amid concerns about soaring property prices.

The hike caused customers to move to cheaper principal and interest home loans, CBA said.

Credit card fees were lower and its treasury and trading units also reported a weaker “performance”, the bank said.

$1 = 1.3419 Australian dollars Reporting by Paulina Duran in Sydney. Additional reporting by Rushil Dutta and Susan Mathew in Bengaluru; Editing by Stephen Coates

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