As results go, the Commonwealth Bank’s were good, but possibly not as
good as David Murray would have us believe. Yet CBA did produce better
results than many in the market believed it could produce, especially
with management in the throes of the “which new bank” revamp of its
retail business.

But Murray made sure we all realised how good it was. Costs down,
revenue up, some tightening of margins, good growth in assets – mostly
from the housing boom in Australia and New Zealand – and expectations
that this “magic pudding” will continue into the near future.

A rosy outlook, predictions of rising earnings and rising cash dividends. A virtuous circle.

And yet given the recent critical article in BRW magazine, the way Murray reacted to it with an attempt to portray a different sort of person in a Weekend Australian story (see Profiling CBA CEO David Murray for Crikey’s take on the matter) there’s a feeling that perhaps the cries of triumph might have been a bit too loud.

Certainly one particular claim that staff were “enthusiastic,
participatory and engaged” raised a few wry eyebrows around the bank,
especially with some staff out doing a bit of “revolting” over what
they say is an inadequate pay offer and the onerous increase in work
pressures flowing from the “which new bank” changes.

Nor was there much mention of the cost savings from the hundreds of
jobs axed in the revamp, which Murray said is producing more gains
ahead of schedule.

But to give the bank its due a 28 per cent rise in earnings to $2.57
billion was good, while the more accepted cash basis, it was a 4.5 per
cent rise to $2.695 billion, but that was with the costs of the “which
new bank” revamp included.

Dividends have been boosted to $1.83 a share in total with a final
payout of $1.04, a rise of 22 per cent. Total payout is up 19 per cent
for the year. Earnings per share rose two per cent on a cash
basis to $2.07. But Murray committed the bank to paying higher
dividends to shareholders with the cost of the revamp included, so he
has succeeded in meeting that promise.

The bank’s funds management business increased its contribution in a
very solid market by 18 per cent to $274 million while the insurance
business’s contribution jumped 98 per cent to $129 million. Both
benefited from the better market conditions in their respective sectors
and the absence of any weakness in stockmarkets.

But to only manage to get an 18 per cent rise to $274 million, on an 11
per cent rise in funds under administration, to $110 billion, isn’t
much good. In fact it emphasises that the CBA is being held back by
that huge plunge into the area in the late 90s that netted the Colonial
First State business. That $9 billion cost isn’t fully being paid
for by the returns from the funds management area.

Another way of looking at it is the bank’s ROE, or return on equity.
The CBA’s was down by 0.1 per cent in the year to 13.2 per cent on a
cash basis. Excluding the NAB, both the ANZ and Westpac have better
returns than that.

With such a strong year in housing and good revenue and earnings flows,
you’d expect the ROE to be better, even taking into account the costs
of the ‘which new bank’ revamp. Should the CBA ever sell its
funds management arm, then the ROE will explode to well over 20 per
cent, where it was before the Colonial buy.

The bank’s cost to income ratio is coming down, especially in the
banking area to where it is just over the 50 per cent mark.
Improvements were reported in insurance and funds management.

But with revenue flowing in from the housing boom, tight conditions and
better conditions in insurance and stock markets, improvements in the
cost to income ratio are to be expected. It’s when things slow that you
see how efficiently banks like the CBA manage their cost controls.

But perhaps the biggest danger is the housing slow down. Total lending
assets rose 18 per cent, thanks to a 20 per cent rise in home loans in
Australia and 35 per cent in New Zealand. Institutional and business
lending rose a more sedate 13 per cent. Murray says the housing
slowdown is manageable.

And on present indications it is, but repeating that sort of growth
this year and the next in housing will be problematic. So a sharp
lowering in costs from the “which new bank” program is going to
be very important to future earnings growth.

Perhaps the biggest problem for Murray is living up to the claim made
in his briefing that the bank’s staff were “enthusiastic, participatory
and engaged”, especially in the per cent which new bank” changes.
That’s still a bit problematic as this Sydney Morning Herald news
report shows – CBA staff seek public support.