Results from the Commonwealth Bank and AMP are another painful demonstration of the bottom-line costs of years of bad behaviour revealed in the royal commission and elsewhere. There will be plenty more costs to come.
But CBA’s Matt Comyn and AMP’s Mike Wilkins are keen to reassure customers and investors that the worst really is over even if there’s still a lot to do.
So Mike Wilkins repeatedly used the word “resilient” to describe AMP’s wealth management business after a horror start to 2018 including the loss of its chief executive, chair and several directors in April.
“While there will be further challenges ahead, we have a strong foundation on which to reset the business and restore the confidence of our customers and the wider community,” the acting CEO declared in his ASX statement.
“AMP Bank and AMP Capital have continued to grow and our Australian wealth management business has again shown its ability to respond to changing market circumstances, broadening its revenue base and managing its controllable costs.”
That expression of confidence comes despite a massive fall in interim net profit to $115 million from $445 million a year earlier.
This is largely due to provisions announced last month for repayments to customers caught up in a reputational debacle over the payment of fees for no service.
As the royal commission is again showing up spectacularly with NAB this week, this practice was certainly not confined to AMP.
And while AMP’s underlying net profit also fell 7 per cent to $495 million from $533 million, particularly affected by higher claims for total and permanent disability, this too is an industry-wide issue.
But the fallout from AMP’s royal commission implosion has so far cost a once dominant institution most of all, with a slumping share price down more than one third this year on top of the forced exit of much of its senior leadership.
Wilkins insists the business has since “stabilised” with the market showing signs of believing him, as the share price rose modestly on Wednesday.
Even though conceding some impact on flows of money in the last few months of the financial year, he argues this has “settled to a certain extent”.
He is also keen to emphasise 143 new advisers have now joined AMP, adding there has been relatively little use of the buyer of last resort provisions in the half year.
This is a legacy arrangement where AMP has to buy out the businesses of exiting advisers at a multiple of recurrent earnings.
But with the need for a period of notice, audits and negotiations, this process can take a year or longer, meaning most of the potential financial impact will be postponed.
Clearly Wilkins and his new chairman David Murray are hoping that by then any instability in the business will be less of a risk even if there are doubts about the commercial underpinnings of its financial advice business and its reliance on legacy products to protect its margins.
AMP-aligned advisers still receive about 20 per cent of income from commissions, not including insurance, for example, due to grandfathering clauses heavily used by many veteran advisers.
Over at CBA, Matt Comyn was sounding even more confident despite announcing the first downturn in the bank’s annual profit growth since the global financial crisis, with a $9.41 billion cash profit, slightly below market expectations, and down 4.7 per cent.
The costs include $700 million for the AUSTRAC civil penalty case and regulatory costs of $155 million linked to the royal commission, AUSTRAC’s civil proceedings and the damning review by the prudential regulator.
Comyn’s in the job now because Ian Narev had to accelerate his departure to prove CBA’s acceptance of culpability and of the need for change no matter the bank’s strong financial performance.
But excluding the hit from discontinued operations and all those nasty “one offs” due to penalties and compensation for clients, CBA’s net profit figure was up 3.7 per cent to just over $10 billion while return on equity was 15.3 per cent.
Even including one-off costs, the return on equity fell slightly but was still an extremely healthy 14.1 per cent.
“It’s certainly good to put the last financial year behind us,” Comyn told analysts. “We are now very focused on the future and making sure we are running our business very well.”
Core banking operations
That includes “much better cost and risk outcomes” as part of simplifying the bank to focus on core banking operations, including discarding the wealth management and insurance businesses that have so tarnished its reputation.
Comyn’s also discarded several senior executives who served alongside him on Narev’s management team. That’s life at the top.
Given the multiple millions of dollars in executive pay at the top of CBA over the past several years, the public will think the reduction in bonuses for the current and recently departed executive team is overdue and still inadequate despite endless talk of core values.
The level of complacency at board and senior executive level described in the APRA report also means Comyn has to be careful to sound extremely alert to potential risks to the business and its values even if reassuring the market these can now be managed well.
CBA is in a “much humbler place” these days, he says.
But he is upbeat about the Australian economy despite more subdued credit conditions, citing low unemployment, inflation and growth above trend.
Even a slowing housing market, he said, is a “good thing long term”. CBA expects home loan growth to fall from 5.6 per cent last year to 4 per cent this financial year with business lending a little stronger than that.