Even though Ralph Norris is highly rated by regulators and bankers as not only doing a good job at the Commonwealth Bank, but also being a good banker, he has an unfortunate tendency to stick his Kiwi boot on his tongue and leave it there.

We had another example yesterday with the interim profit briefing where he said the profit of $3.335 billion cash profit was a return of about1% on assets of $650 billion.

“This level compares with 7 per cent for the 20 largest companies ex-banking,” Norris says. “Yes, we are a profitable organisation, but not excessively so.”

Well, I don’t know about you, but if the CBA earned 7% on $650 billion in assets, that would be a profit of more than $45 billion, which is a trifle excessive.

Norris made a bad apples and oranges comparison: a highly-geared company like a bank can’t be compared to a lower- geared non-financial group.

Banks have low profit margins and lots of assets and a geared balance sheet to boost returns. Industrial or non-financial companies have a small asset basis, but higher margins.

They are chalk and cheese. In fact most times a bank such as the CBA would not lend to a non-financial company with gearing like its own (well in sensible times that’s the case. It did lend to highly geared companies such as ABC Learning, Centro, etc, and paid the price in huge bad debts).

For example, you can’t compare the CBA with the likes of BHP, Apple or Woolworths.

In fact, most regulators and competent bank analysts will tell you that a 1% return on assets for a bank is the yardstick they use to see how well managed a bank is and how profitable.

Banking is like retailing, small margins on hundreds of billions of dollars of assets, geared up or leveraged from a small pot of capital.

What Norris didn’t say and as a banker he should know it, if his bank was earning, say 2% on assets, not only would it be immensely profitable, but either have interest margins so fat that the customers were being screwed every time they used an account or took out a loan, or so highly geared that it would put Anglo Irish or Lehman Brothers for the level of gearing or leverage involved (which would be double the present level of about 12 times capital).

And I don’t know about you, but I would rather have a bank earning 1% or a bit more, or a bit less, than one that tried to fly like Lehman or Anglo Irish (which it must be pointed out wrecked Ireland).

Anyway, the CBA’s profitably is more than adequate: The return on equity on the statutory profit was 17.7%, on the higher cash profit (which is the preferred way banks look at their profitability), it was 19%. That sounds pretty fat to me and in fact is a result of the impact of the leverage on the balance sheet. (By way of comparison the RBA cash rate is 4.75% and most mortgages are around 7%-9%, depending on the frills and bells and business loans are from 6% to about 10%, so the CBA is earning considerably more than its customers pay, thanks to the “joys” of leverage).

Anyway, despite the morning media gush about the result, it was not much to write home about. Dig into the figures and you find a different story.

Just as the National Australia Bank’s good first quarter update was really driven by a drop in bad debts, so too was the Commonwealth’s.

The operating income figure (or gross profit) before bad debts, tax etc for the December 2010 half year was $93 million short of the figure for the December half of 2009.

That’s worked out by taking the total operating income for the December 2010 half year of $9.739 billion and deducting the operating expenses of $4.408 billion. You get a gross operating profit of $5.331 billion. That’s actually $93 million below the figure for the December 2009 half year of $5.424 billion.

It’s not much of a difference, but it does show that in terms of its basic banking business, there hasn’t been much improvement, except in the continuing improvement in bad debts, thanks to the better conditions in the economy and globally.

Total income growth was flat (revenue was up 2%, investment income was lower). Expenses rose 1.4%, the net interest margin for the half year was 2.12%, down 0.06%.

So all in all an average half year for a bank that is very profitable, as a bank, not as a different corporate beast.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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