Six-month cash profit down 1.9% after bank set aside $375m provision against potential fines

This article is more than 2 years old

This article is more than 2 years old

The Commonwealth Bank has seen its half-yearly profits fall after it was forced to set aside $375m as provision against potential fines for alleged money laundering and funding of terrorism.

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Australia’s biggest bank, reporting its final set of results under outgoing chief executive Ian Narev, said on Wednesday that its six-month cash profit fell 1.9% to $4.735bn.

Excluding the provision, earnings for the last six months of 2017 rose 5.8% to $5.11bn – narrowly missing analyst expectations – and the bank lifted its interim dividend one cent to $2.00.

Commonwealth is being prosecuted by the financial intelligence agency Austrac, for 53,700 breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

Austrac alleges the bank allowed its smart deposit machines to be used by four money-laundering syndicates, including three linked to drug importation and distribution networks.

The bank said it believed the provision of $375m was “a reliable estimate” of the penalty a court could impose based on “currently available information”. It also set aside $200m to cover legal costs.

But one legal expert believed the bank had underestimated the fine it was likely to face.

Each breach could in theory cost the bank $21m and it is understood that Austrac wants the penalty to be at least $1bn.

Helen Bird, a corporate governance specialist at Swinburne University in Melbourne, said the amount set aside by the bank was too low.

“The provision of $375m is too conservative,” said Bird. “It is based on the low end of the scale of expectations and it indicates to me that they think their defence will get up. They will say the computers stuffed up and the transactions were not reported.”

The bank’s results come at a time of intense scrutiny for the big four retail banks which between them provide four of Australia’s five biggest companies.

The Senate on Wednesday passed a bill to increase the regulation of the sector. The banking executive accountability regime (Bear) will be established from 1 July and will require banks to conduct themselves with honesty and integrity, while remuneration obligations will also be imposed on directors and senior executives.

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The banking regulator will have beefed up powers to hand out substantial fines, withhold bonuses and more easily disqualify people for poor behaviour.

Also on Wednesday a Productivity Commission report said that Australia’s big banks were being allowed to exploit loyal customers and the sector faces a sustained public flogging when the royal commission into misconduct in the industry opens in Melbourne on Monday 12 February.

Narev will be spared the spotlight after announcing he would be standing down from the top job two weeks after Austrac launched its lawsuit in August.

However, he said “a great deal of effort” had been made on “fixing our mistakes, and becoming a better bank”.

“We recognise, and regret, that these costs arise from our failure to meet some standards that we should have.”



Narev said he remained positive about Australia’s economic prospects but warned about continued market volatility that could affect the country and the bank under his successor, the bank’s retail chief Matt Comyn.



“Market volatility remains a risk given ongoing global uncertainty as to the pace and extent of rate rises,” Narev said. “Market movements over recent days highlight this risk.”

Shares in Commonwealth were down 0.17% to $77.27 on Wednesday morning.