The Commonwealth Bank has beaten market estimates and delivered a bumper $9.88 billion annual cash profit on the back of lower costs, lower bad debt charges and home loan rate increases.
The profit, which was up 5 per cent on last year, comes as Australia’s biggest bank faces allegations of breaching anti-money laundering and anti-terrorism financing laws. In a statement, CBA reiterated that it was limited in what it could say publicly about the court action and "it is not possible to reliably estimate the possible financial effect on the group".
The lender said it is in talks with potential buyers to offload its beleagured life insurance businesse, CommInsure, and that it will look at all options including retaining the business and reinsurance arrangements.
Although the headline result was higher than expected there were few surprises in the detail. Operating income increased by 3.8 per cent, ahead of operating expense growth of 2.4 per cent, delivering positive jaws on an underlying basis.
Net interest income was up 4 per cent to $17.6 billion helped by recent rate hikes, particularly on investor and interest-only home loans. However, only seven weeks of the repricing was booked in the current reporting period.
Net interest margin slipped 3 basis points to 2.11 per cent as a result of "higher wholesale funding costs and increased competition in home and business lending more than offset asset repricing".
As predicted, CBA is also benefiting from very low bad debt costs. Impaired loans as a share of its total loans fell to 0.15 per cent, from 0.19 per cent a year ago.
"Headline indicators show that the Australian economy remains sound overall, albeit variable," CBA boss Ian Narev said. "However many households are concerned about job security, wages and the cost of living.
"Cyclical investment in mining and construction has underpinned our economy for some time. The next wave of more broad-based business investment that we need to secure jobs and lift wages is important."
As expected, management has introduced a discounted dividend reinvestment plan to boost its common equity tier one capital ratio to APRA’s target of "at least" 10.5 per cent by January 2020. Currently the bank’s CET1 ratio stands at 10.1 per cent.
"For our part, we will continue to strengthen our balance sheet to ensure that we can support our customers through a variety of economic scenarios," said Narev.
"We will also maintain our focus on our long-term sources of competitive advantage in our customer base and in technology, while accelerating the focus on productivity that we need to remain competitive for the long term, and listening more to our community to strengthen trust.
"And above all, we will continue to invest in our people, who are the most critical determinant of long term success."