“Underlying profit” is a term used in varying ways by companies, but
usually it is an attempt to look behind the short term vagaries to
produce a sense of how the company’s profitability went in a reporting
period, with distortions (on the negative and positive) stripped out or
reduced in impact.
Banks use it quite often because they have a statutory and a cash basis
on which they report. The underlying profit for a bank in an attempt to
steer between the two to produce a figure that is a reasonable attempt
to show how the ongoing business performed in the relevant period being
A year ago the Commonwealth bank used the underlying profit of $1.294
billion to give investors and the market generally a sense of how the
bank was travelling because of the distortions of the “Which New Bank”
revamp of the retail bank which involved heavy spending on new
technology, staff cuts and premises.
The CBA also used the cash basis and highlighted clearly the spending
on “Which New Bank” and kept dividends at a very high level of actual
profit to keep shareholders happy. The word overly generous did come to
mind, but that stratergy has been supported by the latest result.
The bank expenses much of the “Which New Bank” costs in a transparent
move that allowed investors to work out just how the “underlying”
position of the bank was going.
That continued for the year to December and the bank again used the
underlying profit to signal to investors how things were going, while
the dividend payout topped the 80% mark in the interim payout, and
stayed there for the final, leaving investors and analysts to wonder
about the sustainability of that situation.
Well, what a difference a few months make. Spending slows sharply on
New Bank, the statutory and cash basis of reporting profit shows a very
sharp rise in performance (40% to 50%) and the use of underlying profit
declines in the appearance by CEO David Murray.
But not in the CFO’s presentation to the hard headed analysts where a
more modest 12% growth in underlying earnings is reported from the
$1.294 billion of the half to December 30, 2003, to $1.427 billion for
the six months to December, 2004.
Nothing wrong in a bit of spin, is there?
The bank is going well, much better than the market felt even six weeks
ago. In fact in that time the bank’s share price has kicked up, then
down, then about three weeks ago started running from a touch over $32
to well over $35 today ($35.38, up 95c at lunch today).
Looking at the results, you have to wonder if there was some of
inspired investing over the past month. In fact the bank’s shares have
risen in the past three weeks to be near the all time high set in 2002!
But investors should consider the level of dividend payout. Even though
the full franked dividend rose from 79c to 85c, the payout ratio has
fallen to 60% from the 80% plus a year ago as the spending on “Which
New Bank” has slowed, allowing profits to grow.
That means total payout for the year will be around the 60% mark. Final
dividend last year was a very high $1.04. With earnings recovering
because spending on the revamp has fallen, the final this year could be
still boosted past the $1.10 mark.
But it always pay to compare results over various periods to get a
flavour of just how well the company is travelling and how well the
CEO’s pet projects are going.
“Which New Bank” is very much David Murray’s baby.
Last year it was a case of “going well, early days, heavy spending, but
don’t worry the underlying growth of the bank is continuing and look,
here’s a nice fat dividend”.
Now that phase is past, it’s more a case of “Which New Bank” going
great, returns are being seen, bank is going great, earnings up, and
can we get back to what the case was before this all started.
Meanwhile keep an eye on the Colonial funds management business. There
are increasing stories that it is going to be gutted and restructured
to try and remove the drag from the bank’s return on equity which
remains below its peers.
However the bank’s cost to income ratio (underlying, of course) showed
another good improvement falling to 49.7% from 50.8%, as costs slowed
and revenue continued to grow nicely.