By Paulina Duran
SYDNEY (Reuters) - Commonwealth Bank of Australia, the country's biggest lender by assets and market value, posted a 5.7 percent fall in first-quarter cash profit on slowing loans growth and higher funding costs.
The unaudited result comes as Chief Executive Matt Comyn is to be questioned later this month at a powerful misconduct inquiry that has exposed failings in Australia's banking sector, damaging CBA's brand and costing it hundreds of millions of dollars in remediation charges and legal expenses.
Cash profit, a measure that excludes one-off and non-cash accounting items, fell to A$2.50 billion ($1.81 billion) for the three months ended Sept. 30, the bank said in a limited trading update on Wednesday.
That compares with A$2.65 billion a year ago that included profits from its life insurance unit. Those profits have been excluded in the latest quarter because the unit is being sold.
The profit fall came as higher short-term interest rates impacted net interest margins, a key gauge of bank profitability that CBA did not quantify. Compared to the average cash profit in the previous half, earnings were 3 percent higher.
"The quarter saw continued progress against our strategy, with focus on delivering on our ... program of change that will ultimately ensure we are a better, more customer focused bank," Comyn said in a statement.
Australia's banking regulator imposed an extra A$1 billion minimum capital requirement on CBA, saying the measure will last until it overcomes governance issues, after the bank was sued for thousands of breaches of money laundering rules.
In fiscal 2018, CBA took a A$389 million charge in risk and compliance provisions and regulatory costs, including provisions for class action lawsuits and the Royal Commission. It did not show total remediation costs.
Goldman Sachs said in a note on Wednesday the bank could announce compensation charges in the near future.
"Our 1H19 forecasts include A$150 million of pre-tax customer redress costs (A$300 million in total for FY19) and CBA has not announced any additional redress today for the quarter," the broker said.
The Royal Commission inquiry this week said it intends to question senior executives of Australia's "Big Four" banks - which dominate 80 percent of the local home loan market - about banking culture, governance and remuneration practices that has led to widespread misconduct.
LOAN GROWTH SLOWS
Growth in the mainstay home loans segment during the quarter was 3.1 percent, well below the industry average of 5.2 percent - itself the lowest in five years as demand for housing falls. Business lending fell 4.2 percent during the quarter, largely driven by sharp falls in corporate lending, Comyn said.
Home prices in Australia's biggest city, Sydney, had their worst annual performance since 1990 in October, data showed last week, pointing to a further slowdown in coming months.
Property values in Sydney and Melbourne skyrocketed to record levels last year as all-time low interest rates fuelled a debt binge in the housing market.
But a regulatory clampdown on risky lending helped cool the sector while interest from Chinese buyers evaporated as authorities there cracked down on capital flows.
Despite slowing demand for home loans, CBA raised variable mortgage rates by 15 basis points in October, which should help margins in the first half.
Bad debt charges for the quarter rose slightly to A$216 million for the quarter but remained at 11 basis points of all loans, the bank said. Troubled assets also rose, driven by impaired home and corporate loans.
Commonwealth Bank’s common equity tier 1 ratio stood at 10 percent as of Sept 30, however, accounting for the impact of recent divestments, including the sale of its asset management business, its CET1 ratio is about 11.2 percent, much higher than the minimum required by the regulator.
As a result, UBS analysts expect the bank could return up to A$5 billion in capital to shareholders in fiscal 2020.
Australia's four major banks - Westpac Banking Corp, Australia and New Zealand Banking Group, and National Australia Bank and CBA - reported a combined A$29.5 billion in annual profits for fiscal 2018, down 5.5 percent from the previous year, hurt by remediation costs and lower margins.
($1 = 1.3848 Australian dollars)
(Reporting by Rushil Dutta in Bengaluru and Paulina Duran in Sydney; Editing by Robin Pomeroy and Muralikumar Anantharaman)