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31/05/2021 APRA halves CBA's $1bn capital charge on governance progress THE AUSTRALIAN APRA halves CBA's $1bn capital charge on governance progress By JOYCE MOULLAKIS, SENIOR BANKING REPORTER B:1IAM NOVEMBER 20, 2020 . 2. NO COMMENTS The banking regulator has halved the capital charge imposed on Commonwealth Bank for governance failures, citing "significant progress" in the bank's action plan to fix the issues. In a statement on Friday, the Australian Prudential Regulation Authority said it was cutting the $Ibn capital add-on applied to CBA by $500m in response to the bank's improvements on governance, accountability and risk culture frameworks and practices. The change is effective immediately, although CBA has not been given a complete clean bill of health, given a remaining $500m capital add-on imposed on the bank is staying in place. APRA forced CBA to hold more capital in May 2018 as part of its response to the damning final report of the prudential inquiry into the bank. That followed a spate of scandals at CBA and a string of breaches of anti-money laundering and counter terrorism financing laws that culminated in the bank paying a $700m penalty to Austrac. That inquiry concluded: "CBA's continued financial success dulled the senses of the institution, particularly in relation to the management of non-financial risks." At that time, CBA entered an enforceable undertaking and committed to addressing the findings, and APRA slapped the bank with a $1bn add-on to its operational risk capital requirement. Under the terms of the undertaking, a remedial action plan (RAP) was provided to APRA for approval, and CBA appointed Promontory as an independent reviewer to report quarterly on progress against the document. In Friday's statement, APRA said CBA's latest quarterly report indicated "significant progress" in executing the action plan.31/05/2021 APRA halves CBA's $1bn capital charge on governance progress "Recent work by APRA to validate CBA's progress against the RAP ... in areas such as risk management and compliance, remuneration and risk culture, supports that assessment, although a substantial body of work is needed to ensure the improvements are fully embedded across the whole CBA group," the regulator added. In a separate statement, CBA said the reduction by APRA of the capital charge would boost its common equity tier one capital ratio by 17 basis points. New & improved business newsletter. Get the edge with AM and PM Sign up briefings, plus breaking news alerts in your inbox The bank's shares rallied 1.4 per cent to $80 on Friday, bucking a 0.1 per cent decline in the S&P/ASX 200. 'We welcome APRA's acknowledgment of the progress we have made over the past two years. At the same time, we and APRA recognise there is still a substantial amount of work to do before our remedial action plan is fully implemented and embedded," chief executive Matt Comyn said. We remain committed to achieving these outcomes and to ensuring the improvements to strengthen governance, accountability and risk culture frameworks, practices and outcomes are sustained." Westpac was the latest of the major banks to be hit with an additional APRA capital charge of $500m for governance and risk shortcomings in December, which took the total add-on capital the bank must hold to $1bn. That followed Austrac's legal action - now settled with Westpac for a record $1.3bn penalty - over more than 23 million breaches of financial crimes laws. ANZ and National Australia Bank were both ordered by APRA to hold an additional $500m in capital, given sell' assessments by the banks of governance and culture in light of identified failings during the Hayne royal commission. JPMorgan analysts said APRA's reduction of CBA's capital charge aligned it with ANZ and NAB, but also positioned the bank in good stead to return capital to investors if COVID-19 risks eased. They put CBA's pro-forma key capital ratio - after asset sales and APRA's announcement - at 12.5 per cent."This healthy gap to peers will drive larger capital management for CBA relative to the other majors once the board has sufficient confidence post COVID-19," JPMorgan said. "The quantum will depend on the extent of credit risk migration throughout the pandemic." CBA will next update investors on the prudential inquiry progress in February. The last update by Promontory noted CBA's accountabilities had "been sharpened", but cautioned the bank would face "new challenges" moving from design and implementation of the action plan to an embedding and closure phase. As at June 30, CBA had submitted on time to the independent reviewer 139 of 176 milestones. The reviewer had closed 116 milestones and a further 23 milestones were in assessment. JOYCE MOULLAKIS, SENIOR BANKING REPORTER Joyce Moullakis is a senior banking reporter. Prior to joining The Australian, she worked as a senior banking and deals reporter at The Australian Financial Review
