CBA’s slight miss in full-year profit result
As expected, remediation costs hit the bank’s full-year results but despite the impact, the result is also reflective of the broader market outlook.
On Wednesday, the Commonwealth Bank announced a cash profit of $8.5 billion, down 4.7 per cent from the previous period.
According to a note from Moody’s vice president Daniel Yi, the result reflects the challenges facing Australian banks amid a low credit growth and low interest rate environment.
Customer remediation costs grew by $1 billion to $2.2 billion which weighed on the results as well as regulatory costs and a 3.9 per cent fall in bank income as the bank removed its conflicted fee model foregoing $415 million annually.
“The result is a slight miss but not a bad miss and mainly driven by higher operating expenses,” Morningstar bank analyst David Ellis said.
While remediation costs impacted the bottom line, Ellis noted that at least there were no additional remediation costs announced.
Dividends remained flat at $4.31 per share.
Operating income fell 2 per cent while net interest income fell 5 basis points for the year. However, NIM was stable half-on-half.
Net interest income fell 1.2 per cent as volume growth was offset by lower home loan margins and higher funding costs.
Ellis noted that adjusted capital was stronger given the recent sale of its global asset management business.
The bank reported a Common Tier capital ratio of 10.7 per cent up 60 basis points.
For Yu, the bank’s asset quality remains strong but is exposed to softening economic conditions.
Echoing Ellis’ views, he also notes that the divestment of a number of businesses will support the bank’s solid capitalisation, which continues to provide a key support to its strong credit profile.
Importantly Morningstar’s, Ellis highlighted that home loan arrears was stable and in fact improved by two basis points over the year.
“This flies in the face of all the gloom and doom commentary around the financial stress levels of households” Ellis said.
We will see a more aggressive CBA going forward but a sensibly aggressive bank
Other positive highlights for Ellis included an increase in customer deposits and home lending.
Customer deposits were up 1 per cent, contributing 69 per cent of total funding while home lending
Home lending grew by 1.3 times.
In a media call, CBA CEO Matt Comyn said the bank remained committed to the mortgage broking channel with investment in its risk and operations improving the ability of brokers to write the bank’s mortgages.
“The mortgage broker channel has and will always be an important channel for us. The growth of that market has shown that it is a channel that our customers prefer,” Comyn said.
According to Comyn, the bulk of its mortgage business came from the bank’s branded mortgages.
“We have put on extra people in risks and operations and that has increased response and turnaround times for us, enabling us to perform well during that period.”
Ellis still stands by his view that the bank will reach “newfound levels of operational strength and profitability”, an assessment he made ahead of CBA’s fiscal 2019 results.
“The bank is becoming more competitive and aggressive with their home loan business over the last several months. We will see a more aggressive CBA going forward but a sensibly aggressive bank,” Ellis said.
However, he did note that there are still headwinds for the bank – most notably driven by regulation.
Regulatory and compliance will continue to be a burden while non-interest income will remain under pressure as the bank moves away from conflicted advice models.
In fact, the bank provided an update on its aligned advice businesses including a full exit of its CFP-Pathways advisers who will be able to move to self-licensing arrangements or move to another licensee.
The bank already announced the sale of Count Financial and will eventually close its Financial Wisdom business.
“The estimated pre-tax costs of supporting the Financial Wisdom and CFP-Pathways businesses, their advisers and their customers through this transition, as well as other internal project costs, is approximately $26 million,” the bank said in a statement.