APRA to launch independent CBA investigation

While the CBA CEO discussed this latest move at a national broker event, S&P has warned of possible negative ratings effects as a result

APRA to launch independent CBA investigation



The Australian Prudential Regulation Authority (APRA) has announced an upcoming independent inquiry into the Commonwealth Bank of Australia (CBA) focusing on the group’s governance, culture, accountability frameworks, and practices.

The inquiry is set to be conducted by an independent panel, members of which will be appointed by APRA at a later date. The regulator is currently settling the panel’s final terms of reference, anticipating that the final report will be released to APRA and the public around six months from the commencement of the investigation.

The decision to launch this inquiry stems from a number of concerns around frameworks and governance within the CBA group which have damaged the bank’s reputation, said APRA chairman Wayne Byres.

“The overarching goal of the prudential inquiry is to identify any core organisational and cultural drivers at the heart of these issues and to provide the community with confidence that any shortcomings identified are promptly and adequately addressed,” he said.

“The Australian community’s trust in the banking system has been damaged in recent years, and CBA in particular has been negatively impacted by a number of issues that have affected the reputation of the bank.”

As a result of the investigation, APRA will provide CBA with a set of recommendations for organisational and cultural change where necessary, Byres continued. 

Both CBA chairman Catherine Livingstone and CEO Ian Narev have assured APRA they will fully cooperate with the inquiry, he said.

An expression of confidence

Narev featured on a panel at Think, Aussie Home Loans’ 2017 sales conference on the Gold Coast yesterday (28 August), and fielded some questions about APRA’s recent decision.

“We’re very confident in the practices of Commonwealth Bank. We’re also very confident that we’re all focused in the right direction. But the reality is that in the modern world, the public needs confidence and therefore as APRA has made this announcement … that’s got our full support and cooperation.”

This is a result of a strong, able prudential regulator – one of the best in the world – which will be independent and transparent so the “public can hear from voices other than the voices inside the banking system how the banking system looks,” he said.

Watching for weakness

S&P Global Ratings said that while the agency’s ratings for CBA remain unchanged, it would review and consider the impact of APRA’s investigation.

“We consider that the bank's credit profile is likely to weaken if there were any material adverse findings by this inquiry or any financial penalties, potential material damage to the bank's reputation and franchise, or any indications of weaknesses in its governance and risk management framework,” S&P analysts said in a statement.

“We will continue to reflect on today's inquiry announcement and evaluate the extent to which this news weakens our view of the bank's credit profile and the resulting impact on the ratings and outlook on the bank.”

Erosion in the confidence of CBA’s major stakeholders throughout the bank’s corporate governance processes would also likely weaken its credit profile, they added.

Moody's Investors Service said APRA's announcement would be credit negative for CBA.

“APRA's concerns regarding the culture and practices at CBA are credit negative for the bank, given the reputational damage as well as the cost and use of resources to address any mandated remedial actions,” said Daniel Yu, Moody's vice-president and senior analyst.

“Moody's continues to monitor both APRA's prudential inquiry and the AUSTRAC proceedings to assess the impact on CBA's credit profile from potential fines, damage to the bank's reputation and/or franchise, and weakness in the bank's compliance and risk management framework.”

Taking action now

Treasurer Scott Morrison welcomed APRA’s announcement as an example of a “take action now” approach to the banks, which was both supported and sponsored by the Turnbull government.

“Australia’s banks are well-capitalised, well-regulated and financially sound. However, there have been too many cases and events that have damaged their reputation and standing in the eyes of many Australians, that warrant our regulators taking action now,” he said.

“In the case of CBA, more than a dozen compliance issues have arisen since 2008. It is apparent that while the bank’s board and management have talked about the importance of culture and accountability, the continuing occurrence of these types of issues demonstrates that their actions have so far failed to meet customer and investor expectations. At the end of the day, this is the responsibility of the board and its chair.”

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