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Mixed CBA, AMP results as Royal Commission dust settles

Glenn Freeman  |  09 Aug 2018Text size  Decrease  Increase  |  
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Though the full financial effects are yet to be felt, the fiscal 2018 results from two of Australia's largest financial institutions contained both good and bad news.

Commonwealth Bank's (ASX: CBA) underlying business continues to perform well even after the business and its shareholders endured a horrible year, says Morningstar's David Ellis.

Commonwealth Bank yesterday reported a drop in annual cash profit of $9.23 billion, hit by a $700 million fine after the nation's biggest bank broke anti-money laundering laws.

CBA chief executive Matt Comyn said it had been a "difficult" 12 months, but the bank's business fundamentals remained strong.

He said the bank is simplifying its portfolio, operating model and processes to improve its performance. "We are building a simpler, better bank," Comyn said in a statement on Wednesday.

A marginal dividend increase – a final dividend of $2.31 a share – and only minor reductions in net profit after tax are signs of resilience within the bank, which is the largest of the big four.

"A slightly higher dividend is a vote of confidence in the outlook from the board," says Ellis.
"Despite significant criticism aimed at Commonwealth Bank during the past year, the bank's statutory NPAT declined 'only' 6 per cent to $9.3 billion."

Ellis describes the past 12 months for the bank as "a horrible year … stumbling from one regulatory and legal disaster to another, culminating in a change of CEO in April 2018 and a completely refreshed senior management team".

But despite numerous challenges including assets sales, fines, increased compliance provisions, and prudential inquiries, "the underlying business continues to perform well," he says.

"Many will find this surprising, but the bank's wide economic moat has withstood the unrelenting onslaught with a robust underlying performance.

"For the year ahead, we expect a modest increase in cash NPAT, dividend, and return on equity."

He sees further restructuring, asset sales and portfolio rationalisation in the year ahead, including the planned demerger of its global asset management and local wealth business.

AMP's reputation tarnished

Another of Australia's largest financial institutions, AMP Limited (ASX: AMP) has also suffered reputational damaged as the Royal Commission findings became public in recent months.
According to Morningstar equity analyst, Chanaka Gunasekera, its NPAT $495 million was in line with guidance.

AMP bank finance

Shareholders can't read too much into these results, says Morningstar's Gunasekera

Though AMP declared a 50 per cent franked interim dividend of 10 cents a share, Morningstar forecasts a total 2018 dividend of 23 cents a share – at the lower end of the indicated payout range.

In the context of the Royal Commission, shareholders can't read too much into these results, according to Gunasekera: "It's still too early to deduce a major trend from these numbers."
Pointing to mixed results, he refers to AMP Capital's NPAT growing "slightly below our expectations" but AMP Bank is "performing better than expected".

"As previously announced, wealth protection continued its run of poor performance," says Gunasekera, who believes management should exit these businesses in Australia and New Zealand.

"They distract management from the core growth businesses," he says, but also suggests AMP "may find it difficult to exit these businesses at a reasonable price, given perennial poor performance".

Overall, Gunasekera expects AMP will be in a period of transition for the next few years, with higher compliance costs and lower growth expected to take a toll.

"There is also considerable uncertainty on AMP's strategy, given that it is still looking for a permanent CEO, and David Murray has only recently started as chair of the board. We also expect more fines, higher compensation payments, and potential class actions."

 

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Glenn Freeman is senior editor, Morningstar Australia.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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