The highlight in CBA’s result

  • By Christine St Anne

While the Commonwealth Bank reported a 4 per cent fall in cash profit, Australia’s largest lender continues to set the benchmark for its peers.

This is the assessment of Morningstar bank analyst Nathan Zaia. 

On Wednesday, the bank delivered a profit of $4.5 billion for the first half slightly ahead of analyst forecasts. 

In a statement Commonwealth Bank CEO Matt Comyn said the profit decline was largely due to a number of factors including $83 million of insurance provisions for claims relating to the bushfires; a $100 million loan impairment overlay for drought and bushfires; and also the flow through impact of a number of the pricing changes the bank announced last year to ensure “that we’re delivering better customer outcomes”. 

Zaia noted that the retail business of the bank increased cash profit by an impressive 5.6 per cent, “likely putting investors at some ease given the constant headlines of pressure on bank fees and exponential growth of challenger banks”. 

“We agree there are headwinds, but large customer bases and the funding cost and scale benefits of the majors remain evident.” 

Mortgage growth was up 4 per cent over the six months to December around 1.5 times systems growth with the bank reporting $53 billion in new home lending. The bulk made up of owner-occupier borrowers.  

For Zaia, however, the 1 basis point improvement in net interest margin to 2.11 per cent was a highlight 

However, in a call to analysts, Comyn did signal that the impact of lower cash rates will negatively impact the net interest margin by 4 basis points for the full year, and another 4 basis points in fiscal 2021, - similar to Morningstar’s forecasts. 

On the mortgage front, Comyn said the key drivers that underpinned its growth in lending was the owner-occupier and first home buyer market which the “bank was traditionally strong in and also supportive of our franchise”. 

After two years of remediation riddled results, the first half profit result leaves the bank well placed to return to modest profit growth for the full year

Added to that, the bank has been investing in technology and improving its credit underwriting process “to make sure the speed to decision and turnaround times have been stable and consistent that has enabled us to grow well above system”. 

Comyn acknowledged a competitor like Macquarie Bank has also done well in mortgages and again the focus here was better service levels and good technology which has rewarded both businesses “with additional volume”. 

However, the bank chief expects that the market over time to moderate. 

Beyond its lending book, Morningstar’s Zaia pinpointed a number of key numbers in the result.

The bank’s common equity tier 1 ratio sits at 11.7 per cent and is expected to increase to 12.2 per cent once divestments are finalized-  well above the 10.5 per cent regulatory benchmark.

He also noted that consumer finance, which only makes up 2.7 per cent of loans, fell 6.7 per cent, impacted by softer economic conditions and likely lost share to buy-now pay later businesses.

“Pleasingly, there has been no material change to total provisions related to customer remediation, he added.

Consumer arrears remain low and even improved over the last six months, however, Zaia said this is unsurprising given strong employment and low cash rates.

Impairment expenses of $ 649 million were up 12.5 per cent from last year, and as a percentage of gross loans increased 3 basis points to 17 basis points. 

Excluding provisions for the drought and bushfires it would have been flat at 14 basis points. 

Troubled and impaired assets were stable at $7.8 billion, with the bank reiterating comments made last year that there are pockets of stress in the discretionary retail, agriculture and construction sectors. 

“A growing number of fashion chains falling into voluntary administration over the last 12 months echoes the bank’s comments,” he said. 

Overall, Zaia said that while the cash profit decline “didn’t blow us away, the positive momentum in loan and deposit growth, good cost control, strong credit quality, a market leading digital offering, and excess capital, are all positives for the long-haul, in our opinion. 

“After two years of remediation riddled results, the first half profit result leaves the bank well placed to return to modest profit growth for the full year.”