The Commonwealth Bank could face a $200 million jump in its annual operating costs over the next two years because of legal fees and other costs created by a money laundering compliance scandal, analysts predict.
As the bank prepares for a long and complex legal fight, a report published late last week by Credit Suisse analysts estimated just how much CBA will need to spend – aside from any fines – as a result of the bombshell allegations from Austrac last month.
In a note to clients, the analysts led by Jarrod Martin cut earnings estimates for the bank for this financial year and the next by 1 per cent, and pointed to extra costs from “defensive actions” such as lawyers’ fees and the prudential probe into the bank, which CBA is funding.
“We have downgraded our FY18 and FY19 estimates by 1 per cent in each year to incorporate $200 million per annum of additional operating costs that we see associated with addressing the AUSTRAC allegations,” the note said.
The estimates do not include the potential fine facing CBA if the Federal Court upholds Austrac’s allegations that it broke anti-money laundering laws more than 53,000 times.
The complexity of the legal fight facing CBA was clear at last week’s first court hearing on the Austrac case, at which CBA’s lawyer said that one aspect of Austrac’s case would involve “174 mini-trials.” The bank will file its defence shortly before Christmas, with the next procedural hearing scheduled for April.
On top of the lawsuit from Austrac, the bank is also facing a potential record-breaking class action from Maurice Blackburn, while the corporate watchdog is investigating whether the bank breached its disclosure obligations.
In addition, the Credit Suisse analysts said CBA may be forced to set aside more capital for what is known as “operational risk” as a result of the Austrac allegations.
Operational risks are those that are separate from credit risk (loans not being repaid) or financial market risks. Analysts have highlighted that n banks have less shareholder-owned capital set aside to cover for operational risk than banks overseas.
The Credit Suisse analysts said CBA had relatively less operational risk capital than its rivals, and if CBA were forced to hold similar operational risk capital to peers, this would be equal to lifting its core equity tier one ratio by about 10 basis points. Making banks better capitalised tends to erode profitability.
The fine CBA may face from the Austrac legal action is highly uncertain because no n bank has been sued under the anti-money laundering laws, but Morgan Stanley analysts separately estimated the fine would be up to $2.5 billion.
Credit Suisse highlighted one scenario where CBA faces a fine of $1 billion, and an increase in its operational risk capital, changes that would together equal a 0.45 percentage point hit to CBA’s tier one capital ratio.