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Annual Review2018Becominga simpler,better bank
e are building a simpler, moreWfocused bank, fully aligned tomeeting the needs of customersin our core markets, underpinnedby stronger risk managementand a continuing commitmentto innovation and customer service.We will advance our purpose toimprove the financial wellbeingof our customers and communities.In doing so, we will be guidedby our values: We do what is right We are accountable We are dedicated to service We pursue excellence We get things doneCommonwealth Bank of AustraliaACN 123 123 124
Inside thisreportThe Annual Review provides a summary of key information fromour Annual Report. To view the complete Annual Report 2018 eports.htmlStrategic report 2Performance overview 472018 highlights 248Chairman’s message 4Financial performance An overview of Group and business unit financialperformance and strategic achievementsCEO’s message 75 year financial summary 61Contact us 62Becoming a better bank A summary of the year’s regulatory, legal andindustry reviews and of the Bank’s responses10Our strategy 12Our strategy, the goals we’ve setand progress made during 2018Doing business sustainably The programs and initiatives that supportbetter outcomes for our stakeholders28Our Board 43Our Executive Leadership Team 451
Strategic report2018highlightsCustomersCommunityCustomers servedTax paid16.1 million 4.0 billionOne of Australia’s largest taxpayersDigital customers6.5 millionLargest branch and ATM networkin Australia1,267 branches Group total4,253 ATMs Group totalMobile banking app Net Promoter Score37.8More than 10 points above closest major bank peerCommunity investment 290 million21,900 volunteering and pro bono hoursCommBank Foundation1,240 grantsFor youth, education and health organisationsFinancial education568,000 studentsParticipating in Start Smart sessions2Commonwealth Bank of AustraliaAnnual Review 2018
Strategic report2018 highlightsOur peopleShareholdersNumber of employeesNet profit after tax49,125 9,233 million cash basis 9,375 million statutory basisEmployed in 15 countries, 40,508 in AustraliaContinuing operationsWomen in Manager roles and above44.6%Dividend per shareWomen in Executive Manager rolesand above 37.6% 4.31Total hours of training1,847,000 Average hours of training per employee 34.1 hoursEmployees working flexibly73.7%20% work part-time or job shareFull year, fully franked, cash basis% of cash net profits returnedto shareholders80.4% 7.6bn in total, 79% of shareholders are AustralianAmount received by the average retailshareholder in dividends 3,8533
Strategic reportChairman’smessage“Your Board, management teamand our people are committedto making CBA a better bankand to achieving our purposeof improving financialwellbeing for our customersand communities.”Catherine Livingstone AOChairmanDear Shareholders,This has been a difficult year. Confidence in the Bankhas been severely tested due to a series of conduct andcompliance issues. As a result, trust in the Bank, and itsreputation and standing, have been damaged.The Board and I regret, without reservation, the Bank’sfailings over recent years, and apologise to all of ourstakeholders for what has happened.The Bank has, however, continued to deliver serviceand market-leading innovation for our customers, andhas continued to contribute to our communities. Ourbusinesses have performed well this year, and we havemaintained our capital strength. This financial performancehas supported a strong dividend for shareholders andenabled the Board to determine a final dividend of 2.31per share, taking the full year dividend to 4.31 per share,fully franked, up 2 cents on last year. It has also been ayear of renewal at the Bank, and we have taken action toset the Bank up for future success.Regulatory and compliance issuesWe take full responsibility for the issues we have faced,and are committed to addressing our failures. An outlineof the year’s main regulatory, legal and industry reviewsis provided on pages 10–11 of this report.4Commonwealth Bank of AustraliaAnnual Review 2018
Strategic reportChairman’smessageThe Board and I would like to provide context for ourapproach to these issues and the rationale for thedecisions we have made. In coming to a settlementwith the Australian Transaction Reports and AnalysisCentre (AUSTRAC), we agreed to pay a civil penaltyof 700 million. This is a very large sum of money, andunderstandably, a serious concern for shareholders.Factors that contributed to the size of the penalty includedthe Bank’s financial size and the significant role the Bankplays in the Australian economy.When considering how to resolve the issue inshareholders’ best interests, the Board formed the viewthat mediation and settlement with AUSTRAC woulddeliver the best outcome overall. It enables us to focuson improving our risk and compliance capabilities, andto move forward and work constructively with AUSTRAC.The Board also determined that it was in shareholders’best interests to reach an agreement with the AustralianSecurities and Investments Commission (ASIC) to settlethe legal proceedings in relation to claims of manipulationof the Bank Bill Swap Rate. This brings to an end theuncertainty around bills trading, acknowledges our pastmistakes and where we could have done better, and itallows us to focus on productive engagement with ASIC.We are participating transparently and fully in the RoyalCommission and we believe that through the processof scrutiny and reflection we will become a better bank,and that the Australian financial services sector will alsobe strengthened.APRA Prudential Inquiry into CBAIn August last year, the Australian Prudential RegulationAuthority (APRA) announced that it was establishing anindependent prudential inquiry into the Bank. The decisionto initiate the inquiry was prompted by the succession ofissues confronting the Bank, and concerns regarding itsgovernance, culture and accountability frameworks andpractices.We welcomed the opportunity for independent partiesto take a fresh view, and co-operated fully with the inquiry.We have since welcomed the final report, and the clearroadmap that it provides for us.A key finding was that more rigorous Board andExecutive level governance of non-financial risks,particularly operational and compliance risk, is required.The report emphasises the importance of accountability,where everyone owns their actions, and where exactingstandards for risk and customer outcomes are reinforcedby remuneration practices.The report is also clear on the need for cultural change.We need to be less complacent and reactive andinstead be more reflective, open to challenge andcustomer focused.Following the report, we have entered into an EnforceableUndertaking (EU) with APRA. Under the terms of theEU we have provided APRA with a Remedial ActionPlan, which APRA has approved. The plan outlines theactions we are now taking to ensure that our governance,accountability and culture frameworks and practicesare significantly improved and meet the high standardsexpected of us. We have also further improved ourperformance review and remuneration policies andpractices to ensure greater accountability for risk andcustomer outcomes.We have reported to APRA on the extent to which thefindings of the report have been reflected in remunerationconsequences for current and past executives. Theseoutcomes are outlined in the Remuneration report in theAnnual Report.We understand the scale of change which is necessary,and its seriousness, in order for us to become a better,stronger bank for our customers, people, regulatorsand shareholders.Your Board and management team are working to ensurethis is achieved.The way forwardThe selection of a new Chief Executive Officer was a keypriority this year. The Board sought to appoint a candidatewho would maintain momentum in the business whileaddressing the regulatory and reputational challenges andresponding to evolving community expectations. We alsosought a candidate who could transform the business tomeet the rapidly evolving competitive and technologycentric environment.In appointing Matt Comyn to the role of CEO, we areconfident that he has the mix of attributes and valuesneeded to lead the Bank. Matt has now appointed a verycapable leadership team with deep skills and experience.The Bank’s purpose and strategy, outlined on pages12–27, provides clear direction. It commits us to deliverfor our stakeholders in a balanced and sustainableway. In emphasising trust and reputation, it recognisesthe importance of having the community’s confidenceand support.Our decision to prioritise our core businesses andcapabilities will allow us to become a more focusedbank. The proposed demerger of the Group’s wealthmanagement and mortgage broking businesses willenable both companies to pursue growth and investmentdecisions appropriate to each business.5
Strategic reportChairman’smessageBoard renewalThe program of Board renewal continued this year,with the objective of ensuring that the Board has theappropriate mix of skills, expertise and experience toaddress current and emerging opportunities and issues.I would sincerely like to thank Andrew Mohl and BrianLong who will both be retiring at our Annual GeneralMeeting on 7 November 2018. They are long-servingDirectors and have contributed specialist expertise tothe Board’s deliberations.In September 2017, Rob Whitfield was appointed anindependent Non-Executive Director. He adds broadrisk management and public sector experience, as wellas extensive banking experience, to the Board’s skillsand expertise.In March this year, Anne Templeman-Jones joined theBoard. Anne is an experienced listed company NonExecutive Director and has a strong background inrisk, corporate banking, insurance, advice and wealthmanagement.Commitment to be a better bankWhile this has been a very difficult year for the Bank,we now have the impetus for change and a blueprintfor strengthening the organisation.Your Board, management team and our people arecommitted to making this a better bank and to achievingour purpose of improving financial wellbeing for ourcustomers and communities.Thank you for your support.Catherine Livingstone AOChairman6Commonwealth Bank of AustraliaAnnual Review 2018
Strategic reportCEO’smessage“The work we are doing tobecome a simpler, betterbank will deliver balancedand sustainable outcomesfor all our stakeholders,and importantly, drivelong-term and sustainableoutperformance for you,our shareholders.”Matt ComynChief Executive OfficerDear Shareholders,As you know, the Bank has faced significant challengesthis year. This happened because at times we let ourcustomers down, our operational risk and compliancecapabilities simply weren’t good enough, and we weretoo slow to fix our mistakes. I am sorry for these failings,and I am committed to doing what is necessary to putthings right.The required changes are now underway, and we arebuilding on the Bank’s strong foundations. More than16 million customers choose to do business with us.We are the first choice for home loans, householddeposits and digital banking. We have more branches inmore places, we rank first for our technology, and we arefinancially strong.Our financial results for the year reflect these strengths.Operating momentum was resilient, driven by our corebanking businesses which delivered good volumemargin management in home and business lending,ongoing growth in transaction accounts and deposits,and continued uptake of our market-leading digitalbanking services.Operating expenses were impacted by a number of oneoffs including the AUSTRAC civil penalty and regulatoryand compliance costs. Excluding these items, expensegrowth was maintained at low levels due to productivityinitiatives. This supported growth in overall earnings,excluding non-recurring items. Importantly, our balancesheet continued to strengthen across funding and liquiditymetrics, and we remain one of the best capitalisedbanks in the world. This performance has supported anincreased dividend for shareholders.7
Strategic reportCEO’s messageEarning trustWhile it has been important to focus on maintainingbusiness momentum, I’ve also been determined to faceup to issues and fix them so that we can earn the trust ofour customers, regulators and the community, and restoreyour confidence and pride in your company.To earn our customers’ trust we have to deliver betteroutcomes. That’s why my leadership team is prioritisinglistening to customer complaints and fast-tracking theresolution of longstanding issues. It’s also the reasonthat we’re focused on improving our customers’ financialwellbeing through the products and services we provide.This includes investing in new CommBank app featuresthat help customers save more, spend less and stay incontrol of their finances.To understand our customers’ level of trust in us, weare now measuring our Net Promoter Score (NPS). NPSsubtracts our detractors from our promoters and is a goodindicator of whether our customers would recommend usto their family and friends.To earn the trust of our regulators we are committedto engaging in a way that is proactive, transparent andresolution-focused. A key step forward was settling theanti-money laundering proceedings with AUSTRAC.Importantly, we are investing in our financial crimescapabilities and have a comprehensive program inplace. We are pleased to be working constructivelywith AUSTRAC to help protect the integrity of theAustralian financial system.We also reached an agreement with ASIC to settlethe Bank Bill Swap Rate legal proceedings. We havegiven ASIC an enforceable undertaking under whichan independent expert will confirm that the changesthat we have made, and will be making, to our controls,policies, training and monitoring in connection with ourBBSW business are sufficiently robust.As the Chairman noted, the APRA Prudential Inquiry intoCBA, and its final report, have been pivotal for us this year.While the report made for confronting reading for me andmy team, we believe it is fair and balanced and that itprovides a clear roadmap for the organisational changerequired. The Remedial Action Plan we’ve developed,and which has been endorsed by APRA, contains ourcommitments to fix the issues identified. Each of usis now accountable for making these improvements.8Commonwealth Bank of AustraliaAnnual Review 2018We are also committed to earning the community’strust. The Royal Commission is bringing to light mistakeswe have made, the impact of those mistakes, and thechanges required to meet community expectations.To measure our progress in earning the community’strust, we will track and disclose our reputation scorerelative to a group of the largest ASX-listed consumerfacing companies.Most importantly, to ensure we don’t make mistakes thatundermine trust in the future, we are working hard toachieve better risk outcomes across the Bank. We arefocused on strengthening our operational, complianceand conduct risk capabilities, and building a risk culturewhich emphasises that everyone is accountable for allthe risks in their business. This is being reinforced throughconsequences for poor risk management, and rewardsfor identifying and managing risk well.Setting a clear directionMy second priority has been to set the Bank on the rightcourse for future success.Key to this has been articulating a simple purpose forthe organisation. Our purpose is to improve the financialwellbeing of our customers and communities. It providesclear direction to our people and guides our strategy.Our ability to deliver good customer outcomes dependson having an energised and accountable team. To help ourpeople understand what we stand for, and to drive actionsand behaviours, our values have been updated. Therevised values are simple and action-oriented: we do whatis right; we are accountable; we are dedicated to service;we pursue excellence; and we get things done.I have renewed the Executive Leadership Team to drivechange and lead our people through the transition.In appointing new executives, I focused on individuals’values, attributes and behaviours to ensure the right fitfor each role, while creating a good balance of externalexperience and knowledge of the Bank. I am confidentthat your new management team has the skills andexperience required to lead the Bank into the future.
Strategic reportCEO’s messageBecoming a simpler, better bankfor our customersOur strategy is to become a simpler, better bank,supported by stronger capabilities, that delivers balancedand sustainable outcomes for customers, the community,our people and shareholders.Our retail and commercial banking franchises will be at theheart of what we do. We aim to continue to lead in digitalbanking and to offer a range of options for customers tointeract with us, including through our branches, businesscentres and Australia-based call centres.For our retail customers, key priorities include maintainingour market-leading online banking offering, and providingthe best proprietary home buying experience.In our business bank, we will be focused on providingproducts that best fit our customers’ needs, and onimproving our service delivery by better integratingour relationship, product and analytics teams. In theinstitutional banking business, we will concentrate onmarket segments where we are well positioned, includingpayments and deposits, and will lend prudently.The strategy of ASB Bank, our retail and business bankin New Zealand, will be closely aligned with our Australianbusinesses, but it will continue to operate on a stand-alonebasis so that it can respond to local conditions.Further digitisation of our processes and businesses isalso key to simplification and to providing customers withthe best digital experiences.Demerging our wealth managementand mortgage broking businessesThe proposed demerger of our wealth managementand mortgage broking businesses is an important steptowards simplification. It will result in the creation of a new,leading wealth management business (NewCo). It willinclude Colonial First State, Colonial First State GlobalAsset Management, Count Financial, Financial Wisdom,Aussie Home Loans, and our minority shareholdings inCountPlus and Mortgage Choice.Simplifying our portfolioWe have announced the sales of our life insurancebusinesses – including Sovereign in New Zealand,CommInsure Life in Australia and BoComm Life in China.We have also announced the strategic review of PTCommonwealth Life in Indonesia. This is based on ourview that we can best serve customers by partneringwith specialist insurance providers who have the scaleand capacity to invest in market-leading productsand innovation. This is also why we are undertakinga strategic review of our general insurance business.As part of our simplification agenda we are tighteningour international focus. We have also decided to exitour TymeDigital business in South Africa.Strengthening key capabilitiesLooking to the year ahead, we will be working extremelyhard to execute our strategy. We will be investing inoperational risk and compliance to strengthen ourprocesses, systems and governance. We will build ourdata and analytics capabilities to deliver productivityfor our business and better insights for our customers.And we will be reshaping and reducing our cost base sothat we can continue to invest in innovation to meet thechallenges of disruption and to deliver great experiencesfor our customers.My team and I share the conviction that the work weare doing to become a simpler, better bank will deliverbalanced and sustainable outcomes for our stakeholders,and importantly, drive long-term and sustainableoutperformance for you, our shareholders.I look forward to updating you on our progress.Matt ComynChief Executive OfficerThe demerger allows NewCo to pursue growth andinvestment decisions appropriate for its business, andenables shareholders to participate in this opportunity ifthey decide to hold NewCo shares. CBA shareholders willreceive shares in NewCo proportional to their existing CBAholding. This will enable CBA shareholders, who alreadyown these assets, to choose whether to continue owningthem or not.9
Strategic reportBecoming abetter bankRegulatory,legal and industryreview updateWe have been involved in a number ofregulatory, legal and industry reviewsthis year. We have been committedto participating fully and openly, andto providing transparency on theprocesses and outcomes.APRA Prudential Inquiry into CBAOn 28 August 2017, the Australian Prudential RegulationAuthority (APRA) announced the establishment of anindependent prudential inquiry into the Bank (PrudentialInquiry). APRA appointed three panel members,Dr John Laker AO, Professor Graeme Samuel ACand Jillian Broadbent AO, to undertake the inquiry.On 1 May 2018, APRA released the final report of thePrudential Inquiry. It laid out shortcomings in governance,culture and accountability at the Bank. The final reportis constructive and fair and we accept all of its 35recommendations. We are committed to implementingall of the recommendations and have entered intoan Enforceable Undertaking (EU) with APRA.The final report’s recommendations outline five key areasfor improvement: Governance: more rigorous Board and ExecutiveCommittee level governance of non-financial risks. Accountability: exacting accountability standardsreinforced by remuneration practices. Capability: a substantial upgrading of the authorityand capability of the operational risk managementand compliance functions. Customer: injection into CBA’s DNA of the “should we?”question in relation to all dealings and decisions oncustomers. Culture: cultural change that moves the dial from reactiveand complacent to empowered, challenging and strivingfor best practice in risk identification and remediation.APRA also applied a capital adjustment to our minimumcapital requirement by applying an add-on of 1 billion to ouroperational risk capital requirement. We have undertaken onlyto apply for removal of all or part of the capital adjustmentwhen we believe we can demonstrate compliance, to APRA’ssatisfaction, with the specific undertakings within the EU andthe commitments set out in our Remedial Action Plan (Plan).10Commonwealth Bank of AustraliaAnnual Review 2018We submitted our Plan to APRA in June. It contains clearand measurable responses to each of the final report’srecommendations, supported by a timeline and executiveaccountabilities. The Plan has been endorsed by APRA andis subject to a comprehensive assurance framework. ThePromontory Financial Group will act as independent reviewerand will provide quarterly progress updates to APRA.In addition, we have advised APRA how the findings of thePrudential Inquiry will impact remuneration outcomes forcurrent and former executives. See the Remuneration reportin the Annual Report.Work to ensure delivery of the Plan is now underway, and isbeing managed under a dedicated Better Risk OutcomesProgram (BROP).A centralised BROP team, reporting directly to the CEO,will govern implementation of the Plan. Business unit andsupport unit leaders are accountable for execution of thePlan. Work is already underway, for example an ExecutiveLeadership Team Non-financial Risk Committee, one of therecommendations, has been established and held its firstmeeting in June, and similar forums are being establishedin each business unit and support unit.BROP will also govern major risk uplift programs, and buildspecific additional capabilities including system, data andreporting foundations, to support delivery of the Plan.AUSTRAC proceedingsOn 4 June 2018, we announced that we had entered intoan agreement with Australian Transaction Reports andAnalysis Centre (AUSTRAC), the Australian Government’sfinancial intelligence agency, to resolve the civil proceedingscommenced by AUSTRAC in the Federal Court of Australiaon 3 August 2017. AUSTRAC’s claim alleged past andongoing contraventions of four provisions of the Anti-MoneyLaundering and Counter-Terrorism Financing Act 2006 (Cth).The agreement with AUSTRAC has been approved by theFederal Court.As part of the agreement we have incurred a civil penaltyof 700 million, together with AUSTRAC’s legal costs.Banks have a critical role to play in combating financialcrime and protecting the integrity of the financial system.In reaching this position, we have also agreed withAUSTRAC that we will work closely together in an openand constructive way.We are committed to build on the significant changes madein recent years as part of a comprehensive program toimprove operational risk management and compliance atthe Bank. We continue to make significant investment in
Strategic reportBecoming abetter bankanti-money laundering (AML) and counter-terrorism financing(CTF) compliance, including upgrading and enhancing ourAML/CTF technology, updating our process documentation,investing in further resourcing, and strengthening trainingof our personnel.We have acted to strengthen financial crime capabilities,and have invested significantly recognising the crucialrole that we play, including through our Program ofAction with coverage across all aspects of financial crime(including AML/CTF, sanctions and anti-bribery andcorruption) and all business units. The Program of Actionis uplifting the Bank’s processes for monitoring, managing,reporting and controlling financial crime across all of ouroperations, including how we engage with and informAUSTRAC and other regulators, and the operating model ofthe Bank which relates specifically to financial crime to ensureincreased confidence in managing this area of risk.We have changed senior leadership in the key rolesoverseeing financial crimes compliance supported bysignificant resources and clear accountabilities.Two class actions have been filed alleging that we failedto disclose to the market, prior to 3 August 2017 whenwe became aware of the AUSTRAC proceeding, materialinformation in relation to aspects of our AML/CTF controls.We reject the assertion that we had any price sensitiveinformation in respect of our AML/CTF controls environmentor the risk of the AUSTRAC proceeding, and maintain thatat all times we have complied with our continuous disclosureobligations. We intend to vigorously defend both claims.For more information on the AUSTRAC proceedings,including the Statement of Agreed Facts and Admissions see:commbank.com.au/AUSTRACRoyal Commission into Misconduct in theBanking, Superannuation and FinancialServices IndustryOn 30 November 2017, the Government announced theestablishment of the Royal Commission into Misconduct inthe Banking, Superannuation and Financial Services Industry.The former High Court Judge, the Honourable Kenneth HayneAC QC, was appointed as the Commissioner.The purpose of the Royal Commission is to inquire intothe conduct of banks, insurers, superannuation fundsand other financial services institutions, and to assessthe effectiveness of existing regulatory frameworks andmechanisms for customer redress. A final report is due by1 February 2019, with an interim report due by 30 September2018. The Commissioner’s report is expected to outline hisfindings and recommendations, which may form the basisfor regulatory changes.The Royal Commission is conducting rounds of publichearings, focusing on key elements of the financial servicesindustry, including consumer lending, financial advice, lendingto small and medium enterprises, superannuation, generaland life insurance, and experiences with financial servicesentities in regional and remote communities.The Royal Commission is playing an important role inhighlighting misconduct and conduct below communitystandards and expectations, demonstrating that the industryhasn’t always done the right thing by customers, and it willcontinue to highlight cases where we have made mistakes.We are engaging openly and transparently with the RoyalCommission and carefully considering the issues specificto the Group and the broader issues the Royal Commission,customers, regulators and other stakeholders are raisingaround how the financial services industry operates.Our Royal Commission project team leads our engagementwith the Royal Commission and manages the variousrequirements, including finding and providing requesteddocuments, supporting our witnesses, attending hearings,and preparing submissions.As at 30 June 2018, we had responded to 106 notices toproduce documents from the Royal Commission, provided47 witness statements and 10 submissions. In addition,CBA executives had provided in-hearing evidence to theRoyal Commission on 12 occasions.For more information on the Royal Commission auASIC Bank Bill Swap Rate proceedingsIn May 2018, we announced that we had reached anagreement with the Australian Securities and InvestmentsCommission (ASIC) to settle the legal proceedings in relationto claims of manipulation of the Bank Bill Swap Rate (BBSW).The settlement was approved by the Federal Court in June.As part of the settlement, we have acknowledged that,in the course of trading on the BBSW market in Australiaon five occasions between February and June 2012, therewere attempts to engage in unconscionable conduct inbreach of the ASIC Act. We have also acknowledged thatwe did not have adequate policies and systems in placeto monitor the trading and communications of our staffin order to prevent that conduct from occurring.The settlement also included a 5 million penalty, a paymentof 15 million to a financial consumer protection fund, anda 5 million payment towards ASIC’s costs of the litigationand its investigation. We have also entered into an enforceableundertaking with ASIC, under which an independent expertwill be appointed to review controls, policies, training andmonitoring in relation to our BBSW bu
Largest branch and ATM network in Australia 1,267 branches Group total 4,253 ATMs Group total Mobile banking app Net Promoter Score 37.8 More than 10 points above closest major bank peer Tax paid 4.0 billion One of Australia's largest taxpayers Community investment 290 million 21,900 volunteering and pro bono hours CommBank Foundation 1,240 .
