SYDNEY (Reuters) - Australia’s biggest bank has for years generated blockbuster profits by focusing on retail customers and home mortgages while its competitors sought to build exposure to business and farm lending, even forays offshore.

FILE PHOTO: A man banks at a Commonwealth Bank automatic teller machine in Sydney, Australia, August 28, 2017. REUTERS/Jason Reed/File Photo

But Commonwealth Bank of Australia’s grassroots strategy may now be its undoing, investors and analysts say, as a powerful government inquiry promises to bring unprecedented regulatory attention — and new rules — to the country’s banking market.

Investors are pricing in curbs on major income generators for retail banking expected to flow out of the Royal Commission’s final report which will be handed down on Monday.

Practices including ongoing “trailing” commissions used to reward sales staff, and overly optimistic methods to determine how much money a retail customer can borrow are expected to be targeted, both areas where analysts say CBA has more exposure than its “Big Four” rivals - National Australia Bank, Australia and New Zealand Banking Group and Westpac Banking Corp.

CBA also has the highest proportion of mortgages and credit cards in its overall debt book.

“Being forced to have tighter lending standards will impact all of them, but it will probably impact CBA more,” said Matthew Ryland, portfolio manager at Greencape Capital, which holds bank shares.

CBA declined comment because it was in a blackout period ahead of its half-year results announcement on Feb. 6.

Graphic on share prices: tmsnrt.rs/2SgBQUZ

SHARES HIT

As the Royal Commission made headlines last year with witness accounts of customer rip-offs across the financial services sector, shares of all the major retail banks fell in anticipation of enforced structural changes that would result. A housing downturn and global equities turbulence further weighed.

CBA has fallen less than its rivals since the start of the inquiry but 14 analysts polled by Refinitiv predict it will lag an expected rally after the commission recommendations.

Analysts on average have a 12-month target price for CBA just 4.2 percent higher than its current value.

Shares of NAB, the least consumer-focused bank and largest business lender, are seen rising 18.8 percent from their current level, while ANZ, which also has less exposure to consumer lending, is forecast to rise 13.1 percent.

“They are mainly business banks so growth will probably be better for them,” said TS Lim, a banking analyst at Bell Potter Securities. “For the likes of (CBA), they are very, very dependent on interest income, and the wholesale funding cost is creeping up slowly.”

Citi estimates CBA has made 80 percent of its profit growth in the past two years from home mortgages, and now has CBA as the only big bank without a “buy” rating. Of the majors, CBA has the most “short” positions, or shareholdings of people betting the stock price will fall, according to Australian stock exchange data.

At the inquiry last year, CBA chief executive Matt Comyn said the bank had started applying stricter reviews to check people’s ability to pay home loans, checking applicants’ expenses individually rather than using a formula to estimate out-goings.

Should the Royal Commission recommend banning the formulas, CBA, which still uses that method on about 75 percent of loan applications, would be under pressure to spend more money improving its credit approval processes.

VERTICAL DISINTEGRATION

All Australia’s large banks including CBA sought to grow through the early 2000s by buying wealth management and insurance businesses and cross-selling a suite of services to customers.

But while ANZ pursued an Asia strategy and NAB tried its hand in the United Kingdom, CBA fixed its domestic stronghold by buying Western Australian rural lender BankWest in 2008 and amassing a team of thousands of financial planners.

When the banks reversed course around 2015 and began carving off non-core assets to avoid competition, CBA shed its insurance and fund management subsidiaries, as well as offshore retail banking businesses.

It was left with a sales force and branch network larger than rivals which depended more on paying commissions to push products through brokers.

At the bank’s annual results in August, Comyn backed the strategy of focusing on its “leading retail banking franchise in the country which we’re going to continue to invest in and strengthen further”.

It may not be all bad news for CBA and its investors, some of whom say CBA’s sheer size may work in its favor during the uncertainty as customers stick to what they know.

Windfalls from sales of non-core businesses are also on the cards.

Analysts at Deutsche Bank expect CBA will return about A$3 billion to shareholders by 2020 as it completes the sales of various assets.

“Some people would suggest that poses the biggest risk but that’s not where we are,” said Sean Sequeira, chief investment officer at Alleron Investment Management, referring to CBA’s retail exposure.

However, several analysts said the bank’s retail-first strategy made CBA one of the most affected if the Royal Commission makes lenders disclose account-keeping fees, increase regulation of sales bonuses, or use enforce stricter controls to approve loans.

“We favor the commercially-orientated banks (ANZ and NAB) over retail oriented ... due to the Royal Commission’s focus on consumer lending and financial advice,” Citi analysts said in a recent note.