August 18, 2017 / 4:51 AM / 10 months ago

Fitch: Evidence of Wider CBA Failings Would be Credit Negative

(The following statement was released by the rating agency) SYDNEY, August 18 (Fitch) The Australian authorities' recent proceedings against Commonwealth Bank of Australia (CBA; AA-/Stable/aa-) for "serious and systemic" non-compliance with Australia's anti-money laundering laws are credit negative for the company, says Fitch Ratings. However, any negative rating action would most likely be driven by a broader reassessment of the bank's risk management framework and corporate culture, and/or by the extent of any lasting franchise damage caused rather than from any sanctions imposed via the civil proceedings. On 3 August 2017, the Australian Transaction Reports and Analysis Centre (AUSTRAC), Australia's financial intelligence agency, commenced Federal Court proceedings against CBA. AUSTRAC alleges a number of specific failures related to CBA's roll-out and operation of intelligent deposit machines, including failure to comply with its own procedures, late transactions reporting and failure to report suspicious transactions. CBA will file a defence, which it has indicated will take significant time to prepare. Fitch expects to be in a better position to judge the significance of the issues once the bank lodges its legal defence. A key question for Fitch is whether the evidence points to limited control failings that have largely been remedied or if it appears that the failings are more widespread and/or indicative of weaknesses in corporate culture. Evidence of widespread failings would be likely to have negative implications for the ratings or outlook even if the bank suggests that these have been fixed or are in the process of being fixed. Fitch notes that the bank is involved in a number of other smaller conduct- and process-related issues, including a remediation programme for customers sold ineligible insurance, and a review of superannuation payments linked to part-time employees. This is in addition to previous shortcomings identified in the bank's financial advice and life-insurance operations. There is an increasing risk of management's time and focus being distracted from the core operations of the bank, which may negatively impact credit metrics relative to peers. Changes in management may exacerbate and prolong this process - the bank announced on 14 August 2017 that CEO Ian Narev will be replaced within the financial year ended 30 June 2018. Broader reputational damage for CBA is a potential outcome of the allegations, which could impact its sector-leading franchise in Australian retail banking and potentially result in weaker profitability through increased operating costs and a reduced ability to match peer growth rates. In addition, other regulatory bodies, both in Australia and overseas, may take further action in relation to these allegations, which could prolong this issue for CBA. Fitch will continue to assess any developments and information to determine the magnitude of impairment in the bank's credit profile. Fitch has previously noted that conduct risk is a growing threat for Australian banks and it is a key reason why we have scored Risk Appetite lower than many other rating navigator factors for CBA. For more details, see <a href="">Fitch: Conduct Risk a Growing Threat for Australian Banks, dated 6 April 2016. These proceedings also follow other high profile conduct related issues globally, including at Wells Fargo & Company (AA-/Negative/aa-), HSBC Holdings plc (AA-/Stable/aa-) and Standard Chartered PLC (A+/Stable/a). Contact: Tim Roche Senior Director +61 2 8256 0310 Fitch Australia Pty Ltd Level 15, 77 King St, Sydney, Australia Jack Do Director +61 2 8256 0355 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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