The Commonwealth Bank of Australia has decided to cut the short-term variable remuneration outcomes for its executive team. It maintains, however, that CEO Ian Narev has the board’s “full confidence”.
In an ASX statement made on 8 August, CBA chairman Catherine Livingstone AO said that the decision reflected the “risk and reputation matters impacting the group”.
In an explosive statement last week, Australia’s financial intelligence and regulatory agency AUSTRAC revealed that CBA was the subject of civil proceedings in regards to more than 53,700 contraventions of the anti-money laundering and counter-terrorism financing (AML/CTF) act.
CBA said that the contraventions were the result of a “coding error” on its intelligent deposit machines which allowed transactions of $10,000 or more to be performed without producing the necessary “threshold transaction” reports.
The decision to cut short-term bonuses for the CEO and group executives followed a CBA board meeting held on 7 August to consider the major bank’s financial results as well as the remuneration strategy for senior executives in the 2017 financial year. Noting the cuts, Ms Livingstone added: “Mr Narev retains the full confidence of the board.”
The cuts apply to the “short-term variable remuneration outcomes for the CEO and group executives for the financial year ended 30 June 2017”.
“In reaching this conclusion, the overriding consideration of the board was the collective accountability of senior management for the overall reputation of the group.”
Acknowledging its “shared accountability”, the board also resolved to reduce non-executive director fees by 20 per cent in the 2018 financial year. Using last year's remuneration figures, the short-term bonus cuts would amount to about $16 million for all executives.
The complete details of the remuneration decisions will be released next week in CBA’s annual report, along with the board’s full consideration.
CBA is due to announce its 2017 financial year results on 9 August.
Morningstar ‘disappointed’ in management ‘hubris’
Investment research agency Morningstar noted that CBA is “facing serious reputational damage” as a result of the money laundering allegations and expressed disappointment in “another apparent risk management failing”. The agency blamed the compliance failure on “management hubris”.
In a recommendation released 7 August, the agency downgraded its stewardship rating for CBA to Standard from Exemplary. However, its A$85 fair value estimate remains unchanged, while stock is currently trading 4 per cent below its valuation at current prices.
In regards to the AML/CTF lapse, Morningstar said: “Senior management are accountable for the systems error that caused the bulk of the anti-money laundering allegations and subsequent mistakes in dealing with the alleged breaches. CEO Ian Narev is front and centre of management accountability and responsibility.”
However, Morningstar added that any court-imposed fine would not “significantly” impact on future profits. The agency said: “We forecast medium-term profits above A$10 billion after tax each year, and in our opinion, the bank would be able to cope with a financial penalty if found guilty in the Federal Court. Reputational damage is meaningful and could reduce customer activity across a broad range of products and services.”
In regards to CBA’s financial results to be released on 9 August, Morningstar expects CBA to have a $9.8 billion cash profit for the 2017 financial year.
“If achieved, the cash profit will be 4 per cent higher than fiscal 2016, with EPS up a modest 2.3 per cent.
“Despite the likely solid result, the AUSTRAC proceedings will completely overshadow the underlying business performance.”
Slamming the bank, Morningstar warned that the long-term share price premium as compared to other lenders that CBA “has enjoyed” could be eroded.
“We have long argued that despite the bank being well managed, hubris, overconfidence and/or poor strategy execution are an ever-present risk and shareholder concern. The AUSTRAC court case appears to be an example of management hubris and poor risk management practices in Australia’s largest bank.”
CBA’s money laundering scandal has also increased the chances of a Royal Commission into the major banks, Morningstar noted. Pointing to an environment of “high political risk” and the lapse in risk management compliance at CBA, Morningstar said that a Royal Commission was a likely step for a federal government seeking re-election in the coming two years.
The compliance failures also throw into doubt Morningstar’s earlier assertion that the federal government’s levy on the major banks would be borne by consumers. Morningstar said: “Until the AUSTRAC action, we maintained the cost of the levy would be borne by customers, and to a lesser extent by staff and shareholders, but the significant reputational damage caused by the AUSTRAC revelations may result in the levy being more the responsibility of shareholders through lower future profits and dividends.”