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CBA sees 'absolute need' to cut costs after disappointing FY'19 results

Commonwealth Bank of Australia sees an "absolute need" to reduce its structural cost base, as a 4.7% year-over-year fall in its cash net profit for the fiscal year ended June 30 shows the lender is now further away from its cost-cutting target due to subdued economic growth and compensation to customers for its misconduct.

Australia's largest lender by assets said Aug. 7 that its cost-to-income ratio for the fiscal full year ended June 30 rose to 46.2% from 44.1% a year earlier and 41.8% as of end-June 2017. The bank previously said it aimed at pushing the ratio to below 40% but did not specify a time frame.

The cost increase was largely a result of a government inquiry, which revealed wrongdoings of the bank as well as other financial institutions, including overcharging customers for financial advice and other services. The bank said customer remediation fees, fee removals and compliance costs drove its operating expenses to rise 2.5% to A$11.27 billion from a year earlier, while a 2% year-over-year decline in operating income compounded its cost pressure.

"Our cost-to-income ratio at 46.2% is clearly disappointing in the context of subdued operating income environment. We believe we've made the necessary choices and investments and focus during the given period, but we also recognize going forward that we absolutely need to be able to reduce our structural cost base over the medium term to ensure that we get to a sub-40% cost-to-income ratio," CEO Matt Comyn said during the bank's earnings call.

"Obviously, in the falling income environment as I know a number of you have noted for every 1% reduction of income, we've got to reduce expenses to 2.5%," Comyn added.

In the fiscal year ended June 30, the bank said it spent A$2.2 billion in remediation payments and provisions, an increase of A$1 billion compared to the prior fiscal year. This included A$534 million as compensation for fees charged where there was no service provided by the bank's aligned advisers, A$118 million as refunds to wealth customers and A$182 million as refunds to banking customers.

To achieve the self-imposed cost target, Comyn said the bank will tighten discretionary spending, simplify IT architecture and implement a simpler operating model.

"I mean the cost that we've said a number of times is basically targeting that over the medium term … We're going to be prepared to make the right choices and not to slavishly hold ourselves to that target in any sort of 6-month period," he said.

The bank will also continue to pull back on noncore businesses while striving to be a simpler bank, Comyn said.

The bank will commence with the assisted closure of Financial Wisdom Ltd. business by June 2020. It will also move to close Commonwealth Financial Planning Limited-Pathways. The bank's plan to sell Count Financial Ltd. to Countplus Ltd. is on track to close in October.

"The progress we are making on divestments further strengthens our capital position. This supports continued investment in our business, and subject to prevailing operating conditions, creates flexibility for the board in its ongoing review of efficient capital management initiatives and the delivery of long-term sustainable returns," Comyn said in the results announcement.