Faced with the prospect of low growth, a bank would look to keep the bottom line growing by cutting costs. Commonwealth Bank chief executive Matt Comyn says he wants to get the bank’s cost-to-income down but admits that in the current environment it’s no easy task.
That is a problem that all banks will face over the next year or two, as the housing market recovers slowly and regulatory demands add to costs.
The bank’s operating expenses increased by 2.5 per cent in 2018/19 pushing its cost-to-income ratio up from 44.1 per cent to 46.2 per cent – a fair way above Comyn’s goal of sub-40 per cent.
CBA reported a net profit of $8.6 billion for the 2018/19 financial year – 8 per cent down on the 2017/18 result. On a cash basis, profit from continuing operations was $8.5 billion – 5 per cent down on the previous corresponding period.
Net interest income fell 1 per cent, compared with the previous corresponding period, to $18.1 billion. Other banking income fell 3 per cent to $5.1 billion. Funds management income and insurance income were both down. Total operating income of $24.4 billion was down 2 per cent.
The bank’s biggest driver of earnings is home loans sales. Mortgage balances grew by around 4 per cent in 2018/19 and Comyn says they will grow by a similar amount in the current year. It’s not much to get excited about.
Some of the big expense items were customer remediation costs, risk and compliance programs, enhanced risk and resilience capability projects, growth in staff and IT projects. They will remain big cost items for some time.
Full-time equivalent staff numbers rose by 459, or 1 per cent. Most of that increase was caused by 1050 extra staff working in the areas of risk and compliance, financial crimes compliance, the bank’s better Risk Outcomes Program and co-ordinating responses to APRA’s prudential inquiry into the bank, remediation staff. The total number of risk and compliance staff is 2800.
There was also increased IT spending on risk and compliance projects.
Other project costs included the development of comprehensive credit reporting, the new Banking Code of Practice and Open Banking.
Speaking at yesterday’s investor briefing, Comyn said the bank’s cost-to-income was disappointing. “We need to be able to reduce the cost base over the medium term to our target rate of sub-40 per cent.
“Sixty-four per cent of our investment spend last year was on risk and compliance.”
He said the number of risk and compliance staff would be an ongoing feature of the business.
The bank reported on the remedial action plan it undertaken since its APRA prudential inquiry. As of June 30 it had completed 75 of 156 milestones that came out of the inquiry.
Some of the changes include the establishment of non-financial risk committees in each business unit, the appointment of a chief controls officer (a new role) in each business unit.
Higher IT spending would continue as the bank adjusted to the shift of customers from physical to digital banking.
The bank reported that total remediation cost to date is $2.2 billion, which includes aligned advice remediation of $534 million, wealth customer refunds of $459 million, banking customer refunds and $375 million and program costs of $806 million.