August 7, 2018 / 10:15 PM / in 10 days

UPDATE 3-Australia's CBA sees lower credit growth after horror year hits profit

* CBA reports 4.8 pct lower FY18 cash profit to A$9.2 bln

* Unaudited result marginally better than polled forecast

* Final A$4.31 a share dividend up 2 cents from previous yr

* CEO expects mortgage growth in Australia to fall to 4 pct (Recasts with CEO’s slowing mortgage growth expectations)

By Paulina Duran

SYDNEY, Aug 8 (Reuters) - Commonwealth Bank of Australia (CBA) warned of slower mortgage growth as it reported its first fall in annual net profit in almost a decade on Wednesday, after a year of scandal and upheaval that has scarred its reputation.

The result caps a brutal 12 months for Australia’s biggest lender as it battled hefty penalties for malpractice, changed its CEO and was forced to confront deep flaws in its culture and governance.

“It is certainly good to put last financial year behind us, that enables us to really focus on the future,” Chief Executive Matt Comyn, who replaced Ian Narev in April with a brief to regain the trust of regulators and the community, told analysts.

“While there will be subdued credit growth, particularly versus the last five years, long term we remain very optimistic about the economic prospects of Australia.”

Net profit fell 6 percent to A$9.32 billion after CBA booked a A$700 million charge to account for a record penalty to settle money laundering charges brought against it last year. The last time CBA posted a fall in net profit was in the year to June 2009, according to Thomson Reuters I/B/E/S.

Full-year cash profit from continuing operations - a more closely watched metric because it excludes one-offs and non-cash accounting items - dropped 4.8 percent to A$9.23 billion due to higher funding costs and regulatory charges related to an ongoing inquiry into financial-sector misconduct.

The unaudited cash profit result was slightly better than an average forecast of A$9.1 billion for the year to June 30 from five analysts polled by Reuters, as higher prices for risky home loans and lower deposit rates help offset more expensive wholesale funding.

CBA shares were 2.7 percent higher in the afternoon while the broader market was largely unchanged. They are down 11 percent since Aug. 3, 2017, when the money-laundering allegations first surfaced.

“The result wasn’t good, and the outlook is not good either. Expectations for FY19 are pretty low,” said Omkar Joshi, Sydney-based portfolio manager at Regal Funds Management.

“But a lot of people were positioned for a very bad result and to be honest, it just wasn’t that bad.”

The cash profit excludes the performance of the life insurance unit CBA sold to AIA Group Ltd in 2017 and its loss-making digital banking unit in South Africa, which the bank said was being sold for an undisclosed sum.

FINES AND LAWSUITS

During the year, CBA admitted its traders had attempted to rig a key benchmark rate and that it had breached money laundering and terror financing laws more than 53,000 times.

The bank is now defending two shareholder class actions over its alleged failure to disclose the problems, while the banking regulator has imposed an extra A$1 billion capital charge while it fixes its extensive governance and risk management issues.

Operating income grew 2.6 percent helped by higher loan margins over the year, the bank said. However, this was more than offset by higher expenses.

Despite weaker lending volumes, net interest margins, a key measure of profitability, were 5 basis points higher at 2.15 percent. Net interest income was 5 percent higher at A$18.34 billion.

Growth in Australian home loans fell to a four-year low of 5.6 percent in June, as tighter lending standards and hikes in some mortgage rates sucked the life out of the buy-to-let sector.

Comyn said he expected that rate to fall even further to 4 percent, intensifying competition.

The bank said 90-day mortgage arrears increased to the highest level in at least two years, as households struggled with rising costs of living and stagnant wages.

It declared a fully franked final dividend of A$2.31 per share for a yearly dividend of $4.31 per share, 2 cents higher than the previous year.

$1 = 1.3484 Australian dollars Reporting by Paulina Duran in Sydney and Rushil Dutta in Bengaluru; Editing by Stephen Coates

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