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CBA profit slides 8pc to $8.6b as sales fall and costs rise; bank to exit coal

The Commonwealth Bank has reported an 8 per cent fall in it full year profit as the impact of a slowing economy, falling interest rates and remediation of misconduct took their toll.

Key points:Customer remediation costs increasing by $1b helped drag down CBA's profit and keep a lid on dividendsThe bank says it will exit thermal coal and coal-fired power generation investments by 2030 as it aims to be a zero emissions businessBad debts rose by more than $1b on growing problems in retail, farming and construction sectors

Net profit came in at $8.6 billion compared to $9.4 billion last year.

Underlying cash profit — the bank's preferred measure, which strips out one off gains and losses — was $8.5 billion, slightly below market expectations.

The full year dividend was flat at $4.31 a share.

The lack of a special dividend after the sale of a number of businesses, including the recent $4 billion disposal of Colonial First State Global Asset Management, might also disappoint investors, although the bank chose to bolster its top tier capital buffer with the proceeds.

Chief executive Matt Comyn said CBA had made progress on becoming simpler and better, and still had work to do with its planned exit from aligned financial advice.

"We have removed a number of fees and have taken action on remediation," he said

"The work is underway to implement the recommendations from the royal commission and APRA prudential inquiry will also deliver better customer, risk and business outcomes.

"While this year's results were impacted by customer remediation costs, revenue forgone for the benefit of customers and elevated risk and compliance expenses, our core business continued to do well — underpinned by growth in home lending, business lending and deposits."

CBA chief executive Matt Comyn talks to Elysse Morgan on The Business

Remediation costs increased by $1 billion to $2.2 billion over the year.

Economy slowing

Impacts of a slowing economy showed up in a $1.1 billion jump in troublesome and impaired assets.

Loan impairment expenses rose 11 per cent to $1.2 billion.

The bank said this reflected exposures and emerging signs of weakness in sectors impacted by retailing, agriculture and construction.

Total troubled and impaired exposures now stood at $7.8 billion, or around 0.72 per cent of total exposures.

"Collective provisions increased by $90 million during the second half, mainly due to an increase in consumer arrears and a softening economic outlook," the bank noted.

The number of mortgages and personal loans in arrears by 90 days or more was also higher than a year ago, with CBA noting that, while economic conditions remained "broadly supportive", "pockets of stress" were emerging.

There was another uptick in borrowers with negative equity, where the outstanding mortgage is higher than the value of the property.

"Based on June 2019 valuations, approximately 3.5 per cent of Australian home loan accounts and 4.5 per cent of balances are in negative equity," the bank said.

"72 per cent of negative equity relates to Queensland and Western Australia."

CBA also reported elevated personal loan arrears in pockets of stress in Western Sydney and Melbourne.

Not banking on coal

CBA also made a commitment to exit thermal coal and coal-fired power generation investments by 2030, in line with its support of embracing a "zero emission policy".

Chair Catherine Livingstone said the exit from coal was subject to Australia having a "secure energy platform."

CBA's announcement follows similar recent commitments by insurers QBE and Suncorp to exit the thermal coal sector by 2030 and 2025, respectively.

Market Forces, an environmental lobby group, said CBA's move was a stark warning to industry and policymakers about coal's future in power generation.

"Anyone planning to run a thermal coal mine or coal power station in Australia beyond 2030 must now contend with not being able to get finance from Australia's largest financial institution, or insurance from our two main underwriters," Market Forces executive director Julien Vincent said.

Fintech investment to take on Afterpay

As CBA exits traditional wealth products, it signalled an expansion into the digital world by making a $US100 million ($150 million) investment into the 'buy now, pay later' sector.

The deal with Swedish online bank Klarna will allow CBA to compete directly with the likes of Australian fintech darling Afterpay.

Klarna, while relatively small with a market capitalisation of around $8 billion, is looking to expand its global presence and its 60 million customers.

Mr Comyn said CBA will become Klarna's exclusive partner in Australia and New Zealand and intends to build on the initial investment to grow the business.

'Stretching for positives'

CBA shares fell 2.6 per cent to $77.70 on opening, the worst performance among the big banks in an overall better day on the ASX.

JP Morgan bank analyst Andrew Triggs said the key weaknesses in the results were higher than expected costs and deteriorating asset quality.

"Overall, a slightly disappointing result and the valuation continues to look stretched," Mr Triggs wrote in a note to clients.

"Operating expenses were much higher than expected, driven by further build of staff to meet regulatory and compliance uplift."

In all, the CBA added more than 1,000 full time staff to deal the regulatory demands of the post-royal commission work — with 600 of these becoming permanent.

Risk and compliance costs accounted for roughly two-thirds of CBA's total investment over the year, up from 50 per cent in 2018.

Despite an increase in home and business lending, revenues fell as margins remained tight. The net interest margin is likely to squeezed more when the full impact of the two rate cuts in June and July pass through.

Citi's bank analyst team described it as, "a soft result with difficult headwinds on both revenues and costs."

"With little further detail on the longer term cost base or potential capital management, this result will leave the market stretching for positives."

External Link: CBA results Read More

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