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Fitch: CBA AML Defence In Line with Agency Expectations.

Sydney: The defence filed by the Commonwealth Bank of Australia (CBA; AA-/Stable/aa-) in the proceedings brought against it by the Australian Transaction Reports and Analysis Centre (AUSTRAC), Australia's financial intelligence agency, is in line with Fitch Rating's expectations and consistent with statements made previously by the bank. CBA has also indicated that AUSTRAC plans to file an amended statement of claim alleging additional contraventions. Fitch will examine any additional alleged contraventions to determine if they indicate wider risk management failings at the bank.

As indicated in our release, Fitch: Evidence of Wider CBA Failings Would be Credit Negative, published following the commencement of proceedings in August 2017, any negative rating action would most likely be driven by a broader reassessment of the bank's risk management framework and corporate culture or by the extent of any lasting franchise damage caused, rather than from sanctions imposed via civil proceedings.

The Australian Prudential Regulation Authority's (APRA) inquiry into CBA's governance, culture and accountability frameworks and practices appears the more likely forum to identify any widespread failures in risk management and culture, rather than the more narrow AUSTRAC legal proceedings. The inquiry aims to provide an interim report to APRA in January 2018, with a final report in April 2018. APRA has indicated these reports will be made public.

As noted in our release, Fitch to Monitor if Prudential Inquiry Finds Systemic Issues at CBA, CBA's risk appetite at the mid-point of 'a+' is already lower than its Viability Rating of 'aa-', which underpins the bank's Issuer Default Rating of 'AA-' and partly reflects the rising threat of conduct-related issues. Any widespread failings identified by the legal proceedings or APRA inquiry may result in a downward revision of this score, which in turn is likely to place downward pressure on CBA's ratings. This may be the case even if the issues have been fixed or are in the process of being fixed.

There is limited evidence of a lasting and significant effect on CBA's franchise, even though it is still early after the commencement of legal proceedings. However, Fitch will continue to monitor CBA's competitive position in its core retail market, and more broadly, to determine if its franchise has been damaged. Management time will increasingly be focused on compliance issues, which include the recently announced banking Royal Commission (Fitch: Misconduct Inquiry Adds to Challenges at Australian Banks), in addition to the AUSTRAC proceedings and APRA inquiry, and may detract from the bank's core operations. This may in turn negatively affect CBA's credit metrics relative to peers. Management changes may also prolong the process.

CBA has admitted in whole or in part to most of AUSTRAC's allegations in its defence statement, which is in line with statements made by the bank following the commencement of proceedings. The bank denies 83 of the allegations concerning suspicious matter reports and 19 allegations concerning ongoing customer due diligence requirements. It has also indicated it will seek additional time from the court to address any further alleged contraventions that AUSTRAC may include in any amended statement of claim.

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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Feb 28, 2018
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