From Credit Suisse:
The capital impact of reputational loss
This research note builds on our previous work on the valuation impact of CBA’s reputational loss (refer further: “Commonwealth Bank – Valuing reputational loss” 28 August 2017) by now looking at the possible capital impacts. The two potential key impacts we see in this regard are: (1) A permanent capital impact arising from increased operational risk RWA intensity (we have increased RWA by $15bn from 2H18 in our model); and (2) A temporary capital impact arising from any fines imposed by AML and other regulators or any litigation / settlements paid. We do not consider in this analysis the impact on net capital generation arising from loss of business momentum (arising from say, organisational distraction) nor additional operating costs addressing reputational issues, although in terms of earnings estimates we have downgraded our FY18 and FY19E estimates by 1% in each year to incorporate $200mn per annum of additional operating costs that we see associated with addressing the AUSTRAC allegations (rather than any fines or settlement payments). Such operational costs include the “defensive actions” of funding legal costs of defending the AUSTRAC litigation and the class action, and the costs of funding APRA’s announced prudential inquiry, but not “pro-active” remediation efforts.
