Low bad debts offset weak CBA revenue

Commonwealth Bank has posted third-quarter cash earnings of $2.4 billion on the back of lower loan loss charges offsetting weak revenue growth. Profit for the March quarter was up 4 per cent on the $2.3 billion per cent achieved for the year ago same period and bang in line with analysts’ expectations.

Australia's largest bank said home lending rose by 7.8 per cent year-on year compared with system growth of 7 per cent, the average growth for all Australian lenders.

“Total lending rose by of 10 per cent and deposits by 8 per cent, while net interest margin for the three months to March 31 was slightly lower than in the prior quarter,” CBA said in a release.

Margin trends are a particular focus for analysts who were looking for some improvement in CBA’s net interest margin given home loan repricing and strong credit growth, especially with investor property loans where the bank is approaching the central bank’s ten per cent cap.

While management commentary was light on detail, CBA said net interest income growth was supported by volume growth in key markets, offsetting margin pressures. It further added that growth in home lending continued to be underpinned by strong proprietary channel performance.
 

Analyst view

But based on analysis by Morgan Stanley’s Richard Wiles, third quarter revenue was up only between 1 and 2 per cent year-on-year and was below the 2017 first-half quarterly average due to a “slightly lower" margin "lower" trading income and the impact of Cyclone Debbie on insurance income.

“We would expect an improved outcome in the 2017 fourth quarter due to the benefits of home loan re-pricing and lower weather-related insurance claims,” said Wiles in a client note.

Deposits fell over the period and business lending rose only 0.3 per cent. Credit quality was sound with bank's loan impairment expense dropped to 0.11 per cent of lending, from 0.17 in the first half.

“Consumer arrears increased in line with seasonal expectations and continued to be elevated in Western Australia," said CBA in a statement. “Troublesome and impaired assets were broadly stable across most sectors."

Referring to its home loan portfolio, CBA said investment lending was reduced as a proportion of total new lending in the quarter and new interest-only lending is being closely managed, consistent with regulatory guidance.

“Prudent levels of provisioning maintained, with total provisions at $3.7 billion and no change to overlays for economic conditions,” the lender said in a release. “In wealth management assets under administration and funds under administration rose by 7 per cent and 6 per cent respectively on the back of stronger performance from financial markets and investor confidence.”

The bank's common equity tier one capital ratio rose to 9.7 per cent and capital generation was better as a fall in risk-weighted assets offset a 23 basis point impact from life company non-recourse debt maturity, according to Wiles.

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