May 12, 2019 / 11:02 PM / 6 days ago

Australia's CBA profit hit by fee cuts, refunds

SYDNEY (Reuters) - Commonwealth Bank of Australia on Monday said cash profit dropped 28% in the third quarter as the country’s biggest lender was whacked by falling fee income, rising refunds for wronged customers and squeezed margins.

FILE PHOTO: The logo for the Commonwealth Bank of Australia adorns their head office in central Sydney, Australia, October 12, 2017. REUTERS/David Gray

It is the latest of Australia’s “Big Four” banks to turn in a weak result, weighed down by millions of dollars in provisioned payments to reimburse customers whom a public inquiry found had been overcharged or wrongly billed for services not provided.

CBA said it set aside another A$714 million ($498 million) to compensate customers in the three months to end-March, while lower fees and rising expenses also dragged on profit. That takes total set aside for remediation over A$2 billion.

Shares in the lender fell to a three-week low in early trading, before recovering slightly to be 2.67% lower at noon, while the broader market was down 0.4%.

“They are just playing catch-up with everybody else,” said Jason Teh, chief investment officer at Vertium Asset Management, which owns CBA shares, referring to its compensation payments.

“Obviously the revenue is softer ... the credit environment is softer, the Aussie economy is softer.”

Cash earnings from continuing operations fell to A$1.70 billion ($1.2 billion) for the three months ended March 31, CBA said. It reported cash earnings of A$2.35 billion a year ago.

Fee earnings fell as the bank counted the cost of a tough market and what it calls “better customer outcomes”, including fee cuts, resulting in about A$415 million in forgone income a year.

“The magnitude of the fee resets is significant,” JPMorgan analysts told clients in a note. “We expect (it) to drive downgrades to ... consensus earnings.”

Its net interest margin - the difference between interest paid and interest earned, measuring underlying profitability - fell slightly. The lender said the additional A$714 million in customer remediation provisions should be enough.

“While these additional provisions are estimates that may change, the bank believes it has adequately provided for currently known banking and wealth customer remediation,” the lender said.

CBA and its “Big Four” are still reeling after a quasi-judicial inquiry revealed systematic misconduct in the financial sector last year, with all of them posting their weakest results in years.

“Our absolute focus is on ensuring we are addressing past failings and implementing all of the improvements needed,” Chief Executive Office Matt Comyn said on an investor call, adding the bank expected to refund between A$200 million and A$500 million this calendar year.

In March, CBA halted the demerger of its wealth management and mortgage broking units to focus on refunding customers, mitigating past “issues” and implementing some of the recommendations from the year-long inquiry.

On a statutory basis, net profit fell about 24% to A$1.75 billion.

($1 = 1.4325 Australian dollars)

Reporting by Paulina Duran and Tom Westbrook in Sydney, Nikhil Kurian Nainan and Rushil Dutta in Bengaluru; Editing by Stephen Coates

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