Commonwealth Bank shareholders should brace for a "much more challenging" environment, as the bank grapples with major changes unleashed by its money-laundering compliance scandal, the appointment of a new chief executive, and various high-powered reviews, Citi analysts warn.
As the royal commission on Monday invited victims of bank misconduct to come forward with their stories, and announced its first hearing would be held in three weeks, CBA shares dipped amid fresh predictions of a period of lower performance.
After examining how other banks' shares fared following a major crisis, Citi analysts, led by Craig Williams, predicted CBA shares would perform worse than its peers, citing a series of major changes facing the organisation in 2018.
These changes include the appointment of a new chief executive, a powerful prudential review into the bank's governance and culture, a money laundering compliance scandal that may result in hefty fines, and the royal commission into financial services.
The Citi analysts predicted investors would cut their valuation on CBA shares, as it set about changing the business in response to these challenges, which they said would detract profits.
Their conclusions are based on periods of poor share price performance at National Australia Bank following a foreign exchange scandal in 2004, and at United States bank Wells Fargo in 2016, after a fake bank account scandal that claimed the chief executive.
In both cases there was a major period of upheaval as the banks set about changing management teams, and both banks also suffered from weaker profit performance.
"In previous banking crisis it has been apparent that a fall away in earnings has typically ensued and share price underperformance has followed," the Citi report said.
Earnings in the second half of this year were "likely to be much more challenging," the report said, predicting "a decline in balance sheet momentum combined with rising compliance and remediation costs".
CBA shares dipped by 1.2 per cent to $78.85 on Monday, as Citi cut its rating on the stock to "sell."
Even so, the analysts also noted that others in the market were more optimistic about CBA, and its latest trading update in November was better than expected.
This meant CBA shares had made up for some of the underperformance that followed the Austrac scandal, which emerged in August.
Meanwhile, the royal commission into financial services on Monday announced it would hold its first hearing in three weeks, on February 12, in Melbourne. There will be opening statements from commissioner Kenneth Hayne and senior counsel assisting, but no witnesses called.
Commissioner Hayne also formally called for submissions from the public on misconduct in banking, to be collected through an online form. Consumer advocates have demanded the commission hear from bank consumers as well as banks, and the commission said it would ensure all submissions would be " recorded, reviewed and used to inform the commission's work".
"The commission is required to conduct an inquiry. It cannot resolve individual disputes, fix or award compensation, or make orders requiring a party to a dispute to take or not take any action," the royal commission's media statement said.
The Consumer Action Law Centre on Monday also identified a string of concerns about bank conduct in credit cards, car loans, and mortgage lending in its first submission to the Hayne royal commission.
It said poor lending standards in the $52 billion credit card market was a "significant issue," with about a third of consumers who sought help from the service holding some card debt. It also said there was "systemic irresponsible lending" in car financing.
In the mortgage market, by far the biggest source of household debt, it said the harm caused by banks' lax assessments of customers was "yet to come".
"Should interest-rates increase, many people who have entered into loans where affordability assessments have been inadequate are likely to find themselves unable to make repayments," the submission said.
