2-6-18 7:37 PM EST | Email Article
   By Robb M. Stewart 

MELBOURNE, Australia--Roughly half a billion dollars set aside for possible fines linked with a money-laundering scandal and for regulatory probes held back Commonwealth Bank of Australia's half-year earnings.

The provisions marred what otherwise was a steady performance by Australia's biggest bank, as its closely watched profit margin widened and charges for soured loans eased, even as home-loan lending that has driven record profits in recent years came off the boil.

The bank said it had taken provisions totaling 575 million Australian dollars (US$454.6 million) for the six months through December, including an expense that it said it believes was a reliable estimate of the penalty a federal court could impose for compliance breaches that allegedly led to millions of dollars being laundered through its deposit-taking machines. The remainder was taken as a provision against regulatory and compliance costs, including a judicial inquiry into the country's financial industry that will take place this year.

As a result, Commonwealth Bank's first-half net profit inched up to A$4.91 billion from a record A$4.9 billion a year earlier, despite earnings in most divisions rising and total income for the period rising 3.8% to A$13.34 billion.

"We recognize and regret that these costs arise from our failure to meet some standards that we should have," Chief Executive Ian Narev said.

Mr. Narev, who will step down in April, said the bank had during the last six months focused a great deal on fixing mistakes and "becoming a better bank."

Commonwealth Bank has been struck by a string of legal issues, from a lawsuit launched by the government's financial-intelligence agency alleging it breached money laundering laws that in turn spurred two investigations by regulator and a class-action lawsuit, to a federal lawsuit begun this year that alleged it manipulated a benchmark interbank interest rate. It also faces an royal-commission inquiry this year that will examine the conduct of the nation's banks, financial-services firms, insurers and pension funds.

The bank is revising its defense in the money-laundering case after the regulator added 100 further allegations to its suit. It had admitted a technical fault led to the late filing of thousands of mandatory reports on deposits through its automated machines but said it would defend itself against a number of other allegations. It disputed the financial regulator's allegations of "unconscionable conduct" for its role in setting the bank bill swap reference rate in 2012.

Net interest income was about 6% higher year-over-year for the six months, the biggest driver of income, while higher structured asset-finance income and lending fees were offset by lower trading income in the bank's institutional business. The A$200 million provision for regulatory, compliance and remediation costs helped push up operating expenses 4.7% to A$5.32 billion, the bank said.

Commonwealth Bank's net interest margin, a measure of profitability, a profit measure based on the difference between the rates at which a bank borrows and lends, widened 6 basis points on-year to 2.16%. It also said credit quality remained sound, with its loan-impairment expense slipped 0.5% on last year to A$596 million.

Over 2017, the bank's growth in mortgage lending moderated to 5.2%, underperforming the pace of the wider market, which it said reflected efforts to balance regulatory requirements, risk and returns. The growth for the year was driven by lending to customers planning to live in their property, and came as Commonwealth Bank continued to reduce its overall exposure to booming apartment developments in Australia.


Write to Robb M. Stewart at robb.stewart@wsj.com


(END) Dow Jones Newswires

February 06, 2018 19:37 ET (00:37 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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