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Legal woes weigh on Commonwealth Bank of Australia's fiscal H1 results

Commonwealth Bank of Australia posted a drop in cash net profit for the first half of its fiscal year on Feb. 7, after taking a A$575 million provision for potential regulatory fines and other compliance costs.

Australia's largest lender by assets is mired in a number of legal issues. CBA is defending suits over allegations that it breached money laundering rules and rigged the benchmark interest rate. Meanwhile, the bank is under investigation by the Australian Prudential Regulation Authority over its governance and accountability, while facing a wide-ranging royal commission investigating banks' conduct.

"We did bring a lot of that on ourselves," CEO Ian Narev said during an earnings conference call. The bank is "doing a lot of work to fix it,” he added.

For the six months ended December 2017, CBA's cash net profit fell 1.9% year over year to A$4.74 billion, or A$2.722 per basic share, from A$4.83 billion, or A$2.811 per basic share. The S&P Capital IQ consensus estimate for normalized EPS was A$2.92 for the period.

The bank set aside A$375 million in the fiscal half for potential penalties from the legal proceedings brought by the Australian Transaction Reports and Analysis Centre, or AUSTRAC, the anti-money laundering regulator. Narev said it was a "reliable estimate" of a civil penalty handed by AUSTRAC, while previous media reports suggested that potential fines could reach A$1 billion.

Matthew Wilson, head of financials research at JCP Investment Partners, noted during the earnings call that the bank's estimate of potential fines does not include any possible U.S. action, where fines could be much higher in the billions.

CBA also set aside A$200 million as potential expenses for "currently known regulatory, compliance and remediation program costs." Narev said the provision represents what the bank believes as the most likely outcomes, although "there is a wide range of potential outcomes" from the other regulatory probes into the bank.

"The provisions we've got and we're required to make are always regarding everything we know and all things that we can take into account," Narev said.

Excluding the AUSTRAC penalty provision, CBA said its fiscal first-half cash net profit would have increased 5.8% year over year to A$5.11 billion.

"The underlying business momentum of Commonwealth Bank remains really strong. We maintained very high levels of customer satisfaction, strengthened the balance sheet. We kept innovating and investing in the future," Narev said.

Narev, who will hand over the reins to current retail-banking head Matt Comyn, added: "I think the big change in the financial services agency over the recent period, we've needed to adjust to different scrutiny and expectations. We need to realize that even when things have been going well on the aggregate level, there can be aspects at the business that can weaken it."