Commonwealth Bank CEO to Retire as Bank Faces Allegations -- Update

MELBOURNE, Australia--Commonwealth Bank of Australia Ltd.'s (CBA.AU) chief executive will step down by the middle of next year following allegations that compliance failings by the country's largest lender allowed its banking machines to be used for money laundering over several years.

Ian Narev, who is coming up on six years at the helm of Commonwealth Bank, will retire by the end of the financial year on June 30, although the exact timing will depend on the outcome of an ongoing internal and external search process, the bank said in a brief statement Monday.

Chairman Catherine Livingstone deflected suggestions Mr. Narev's departure had been brought forward or was linked with the allegations and said he continued to have the full confidence of the board.

Speaking to reporters, Ms. Livingstone said broad details of the succession plan were disclosed to provide clarity for the market and certainty for the business.

Mr. Narev had declined last week to say whether he had offered to resign in the wake of a civil suit brought against the bank by the government's financial-intelligence agency, which has spurred an investigation by the securities regulator and questions from the central bank over Commonwealth Bank's behaviour.

The allegations levelled against the Sydney-based bank add to a political cloud over the banking industry following a series of scandals involving poor financial advice and allegations the other three major banks manipulated the country's benchmark swap rate, and have sparked renewed calls from opposition lawmakers for a judicial inquiry into Australia's banking industry.

Mr. Narev has garnered a solid reputation among investors since he took the job in December 2011, helping drive rising earnings amid lackluster economic growth and record-low interest rates. A lawyer and former partner at business advisor McKinsey & Co., he joined the bank in May 2007 as head of strategy before being put in charge of the business and private banking division in 2009.

"Ian has done a remarkable job. There is no one who puts the interest of the bank a higher priority than Ian does," Ms. Livingstone said. She said given there was ongoing speculation on Mr. Narev's tenure, the statement on succession was aimed at ensuring he can continue to focus on managing the business.

Although it was assumed that Mr. Narev would seek to retire from the bank within two years, a transition to a new leader this financial year comes as a surprise given Ms. Livingstone took over as chairman in January and Rob Jesudason only became chief financial officer in July, said one fund manager, who declined to be named.

Pressure has mounted on Australia's largest bank in recent weeks after the Australian Transaction Reports and Analysis Centre, or Austrac, filed a civil suit in the federal court and the securities regulator followed up last Friday with confirmation it had begun its own investigation.

Austrac alleged tens of thousands of compliance failures, contravening the Anti-Money Laundering and Counter-Terrorism Financing Act. Each breach carries a maximum penalty of 18 million Australian dollars (US$14.2 million).

The allegations center on the use of the bank's "intelligent deposit machines," a type of ATM that allows anonymous deposits of up to A$20,000 in cash at a time to be automatically credited to accounts. Austrac's allegations largely relate to a failure to provide timely reports on transactions above a A$10,000 threshold over about three years from 2012, as well as accusations it failed to report suspicious transactions on time or at all, and of not monitoring customers even after it became aware of suspected money laundering.

In the wake of the suit, Commonwealth Bank's board axed short-term bonuses for Mr. Narev and other senior executives for the latest financial year. Ms. Livingstone acknowledged the reputation of the bank and the industry was affected, and said a committee had been set up to deal with the bank's handling of the allegations. However, she said there was no reason to believe the allegations stemmed from deliberate or unethical behavior or from any profit motive.

Philip Lowe, Governor of Australia's central bank, told parliament Friday the industry was under pressure to rebuild trust. "If shortcomings are identified, then there needs to be accountability, and that accountability needs to be through the courts and internally within the organization...people need to be held to account," he said of the case against Commonwealth Bank.

There's no doubt the industry is under pressure on the reputation side and "political push-back," said Mike Hirst, CEO of Bendigo & Adelaide Bank Ltd. (BEN.AU) and deputy chairman of the Australian Bankers' Association. However, he said in a television interview he felt Mr. Narev had done a good job as CEO of Commonwealth Bank.

Commonwealth Bank recorded a net profit of A$9.93 billion in the last financial year, a fresh record driven by continued growth in mortgage and business lending and relatively low bad-debt charges. The annual report, released Monday, showed Mr. Narev's pay fell by more than half to A$5.5 million for the year from A$12.3 million.

Ms. Livingstone said success was an ongoing process, and the board would be looking for extensive experience in its next CEO, as well as someone who demonstrated complete transparency, a collaborative management style and has a "very strong moral compass."

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

August 13, 2017 23:45 ET (03:45 GMT)