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  • CBA share gained 9.37% last week, with the stock settling at $80 on Friday (20 November) against $73.14 on last Friday. 
  • The Australian Prudential Regulation Authority has now lowered the requirement of operational risk capital by $500 million after notable progress made by the bank with respect to the Remedial Action Plan. 
  • Unaudited results for the quarter ended September highlighted a statutory NPAT of $1.91 billion and cash NPAT of $1.8 billion. 
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Commonwealth Bank of Australia (ASX:CBA) has recently acknowledged the Australian Prudential Regulation Authority’s (APRA) review of the Remedial Action Plan (RAP). The regulator has found that the bank has made significant progress in the RAP implementation. 

This progress by the most valued bank in Australia has made the regulator lower its operational risk capital requirement to $500 million from $1 billion earlier. 

CBA noted that the impact of this decision, which is effective immediately, means an increase of 17 basis points to Common Equity Tier 1 capital. At the end of September, the CET 1 ratio stood at 11.8%. 

The regulator gave the CBA Prudential Inquiry Final Report in May 2018 and approved the bank’s RAP by June 2018. 

The progress made by the bank is being reviewed by independent organisation Promontory Australia, which provides the APRA with a quarterly progress report. In its eighth report, the independent reviewer noted that the bank is committed to managing non-financial risk, and accountabilities are now at a better level. 

CEO Matt Comyn stated that the regulator’s decision is reminiscent of the progress made by CBA over the past two years. He also acknowledged that substantial work related to RAP is yet to be implemented and embedded across the bank. 

Related: Banks Amid Lower Interest Rate Regime and Better Economic Outlook

First-Quarter Unaudited Results 

Earlier this month, the bank reported first-quarter trading update. It registered growth in deposits and business and home lending, which allowed to offset the impact of margin pressures stemming from low-interest rates. 

Despite a $1.7 billion dividend payment for 2H FY20, its CET 1 ratio was 11.8% at the end of September 2020. The bank’s household deposits grew by around $16 billion, including significant inflows from the second round of Government stimulus. 

Home loan and business lending growth outpaced the growth in the system. Home lending was benefitted by continued focus on credit decisioning time and higher application volumes. Operating income was flat compared to 2HFY20 average.

Net interest margin was lower due to lower interest rates impact on deposits and capital, higher liquid assets, and unfavourable lending margins. These negatives were offset by an improved funding mix and lower wholesale funding costs. CBA’s non-interest income increased 1%, largely driven by higher Global Markets trading income and lower general insurance claims. 

Lower Wealth and Banking customer remediation provisions helped to reduce operating expenses by 4%. Excluding remediation provision, operating expenses increased by 2%, reflecting higher investment spending, higher staff costs and wage inflation. 

Related: Easy lending laws boost Commonwealth Bank, Westpac, NAB, ANZ share prices on ASX 

Credit Provision and Quality 

In the September quarter, loan impairment expense was $550 million, driven by a provision for the expected pandemic impact on retail and non-retail exposure. Consumer arrears continue to be unscathed by Government support and loan repayment deferrals.

Credit card arrears improved given a higher propensity for consumers to pay down debt and Government support measures. The bank’s total credit provisioning increased to $6.7 billion, meaning a coverage ratio of 1.81% of total risk-weighted assets. 

Funding and Capital 

CBA highlighted a strong balance sheet setting and a favourable business mix. Deposit funding constituted 74% with stable household deposits. 74% of its wholesale funding is now long term with a weighted average tenor of 5.5 years. 

The need for wholesale funding is reducing due to strong deposits and the RBA’s Term Funding Facility, from which $19.1 billion was drawn at the end of the quarter. The bank also issued a Tier 2 instrument of $1.8 billion. 

CET 1 capital ratio (Level 2) was 11.8% and remained well above APRA’s benchmark of 10.5%. The increase in CET1 ratio for the quarter was primarily driven by earnings, divestments, and lower total risk-weighted assets.  

Earlier disclosed divestments by the bank would further increase Level 2 CET 1 ratio of around 50-60 basis points. This would also improve the CET 1 Level 1 ratio, which was 12.1%, by around 45-55 basis points.

COVID-19 Loan Deferrals in October

The reduction in total loan deferred facilities was 59% for the month. Around 89k facilities, representing balances of $26 billion, were either exited, extended or expired. At the end of October, around 52k loans were still in deferral, down by 75% from the June end. 

In home lending, the bank granted an extension to around 9.3k facilities, of which majority extensions originated from Victoria. 

At the end of October, home loans that remained in deferral were around 45k, amounting for $19 billion. Out of these 45k deferrals, 27% are set to expire in November – after which customers will decide to either exit or extend. 

CBA noted that out of the home loans deferred between March 2020 and October 2020, only less than 1% had been impaired. Out of the total (158k), 22k is still under initial deferral. 

From the remaining out of 158k, 23% have extended deferral period for up to 4 months, 73% are now making full repayments, and 4% have been granted with assistance. 

In SME loans, around 4.2k SME loans remained in deferral at the end of October, with a balance of $1.5 billion. Out of these 4.2k loans, 31% are due to expire in November, which remains subject to exit or extension. 

A staggering 95% of loan deferrals availed between March 2020 and October 2020 are now making full repayments. The bank gave assistance to 1% of the borrowers, and 1% have been impaired and downgraded. 


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