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Morningstar | CBA Continues the Remediation and Simplification Journey. FVE AUD 80 Unchanged

Wide-moat-rated Commonwealth Bank of Australia continues to clear the decks with a slew of nonrecurring customer remediation, transaction, and separation costs. We increase our fiscal 2019 forecast operating expenses by a net AUD 165 million pretax, comprising a credit of AUD 135 million for insurance recoveries, AUD 100 million in additional remediation costs, and AUD 200 million in future indemnities for the yet to be demerged wealth business. Consequently, our fiscal 2019 aftertax cash profit forecast declines to AUD 9.9 billion from AUD 10.0 billion. There is no change to our fiscal 2019 dividend forecasts of AUD 4.33 per share, with the payout ratio edging up. Separately, we treat additional total transaction and separation costs of AUD 199 million as noncash items and exclude from our cash profit forecasts. Transaction and separation costs for the global asset management business and the life business of AUD 144 million and AUD 55 million, respectively, will be netted off expected gains when the sales complete in 2019.

The AUD 135 million in professional indemnity insurance claims received relate to the AUD 700 million civil penalty and legal costs incurred in fiscal 2018. The recovery will be netted against operating expenses in first half fiscal 2019. Partially offsetting the insurance recovery is an additional AUD 100 million expense in program and customer remediation costs. Not surprisingly, the multiyear financial crime compliance program and other ongoing compliance and remediation programs are more expensive than management initially allowed. Commonwealth Bank reports interim results on Feb. 6, 2019 and we expect a cash profit of AUD 4.90 billion for the six months to Dec. 31, 2018 and a fully franked interim dividend of AUD 2.02 per share. Our AUD 80 fair value estimate is unchanged and at current prices, the stock is trading 13% below our valuation.

Previously announced transaction and separation costs incurred in the sale of the Colonial First State Global Asset Management business to Mitsubishi UFJ Trust and Banking Corporation of AUD 144 million will be recognised as a noncash item from discontinued operations and excluded from our cash profit forecasts. The sale is expected to complete mid-calendar 2019 and Commonwealth Bank estimates a post tax gain on sale of approximately AUD 1.5 billion net of transaction costs.

An additional AUD 55 million provision will be recognised in first-half fiscal 2019 for transaction and separation costs resulting from the previously announced AUD 3.8 billion sale of the Comminsure Life to AIA Group due to the delay in the sale completion date. Transaction and separation costs of AUD 194 million were reported in fiscal 2018.