Never mind that earnings growth all but stopped in the last six months, never mind a scandal in its financial planning division, never mind a second-half blowout in impaired business and private banking loans … today’s Commonwealth Bank accounts confirm it is an impregnable money-making machine, delivering another record profit of $8.7 billion in 2013-14, up 12% on the previous year, despite a drop in overall revenue.
But while the year-on-year comparisons look good, it was a different story half-on-half. CBA shares dropped as much as 1% this morning as the bank reported total operating income grew by a measly 0.3% in the six months to June to $11,099 billion, from $11,067 million in the December half-year. Eek! But the flat income number was largely explained by one-offs like the boost to first-half profits from the internalisation of management rights to its two former property trusts, and ephemera such as the fact there were three fewer business days in the second half of the year. Stripping all that out, as chief financial officer David Craig explained, operating income was up 3%.
Sticking with the half-on-half comparisons, the bad news was in business and private banking, where income fell 9% to $729 million, and in institutional banking, which fell 13% to $584 million. That was driven by weak growth in lending and, most notably, a near-doubling in the amount of impaired loans. In business and private banking, impairments jumped 91% to $166 million, while in institutional impairments rose 90% to $40 million.
These impairment numbers are small biccies for our biggest bank, but in percentage and momentum terms that’s a big reversal in the last six months, defying a general trend of declining arrears and impairments year-on-year across all lending segments, and suggesting to some analysts that the post-GFC era of ever-improving asset quality -- as bad loans washed through the system in a benign, low-interest rate environment -- might now be over.
CBA chief Ian Narev played down the impairments in the investor dial-in this morning, putting the turnaround down to three or four relatively large, longstanding business loans in separate industries that had gone bad: “[There was] nothing correlated to them at all. All quite unique. We don’t see that as any sign of systemic weakness.”
For those worried about aggressive lending in an overheated residential market, CBA’s figures were comforting: 30-day and 90-day arrears and impairments were down and provisioning was up. Nothing to see there. As one analyst said yesterday, if there’s a steaming pile of bad home loans out there, it’s not going to be at CBA.
In any case, there are buffers in there. For example, the Australian Prudential Regulation Authority gives no credit to CBA for the fact that the bank expects about 70c in the dollar of any bad loan would be covered by lender’s mortgage insurance, provided by Genworth or QBE. Then there’s the fact that, in the retail bank, net interest margins (the difference between the interest rate the bank pays depositors and charges borrowers) stand at a very healthy 2.5% -- which is a lot in a low-interest rate climate.
The overarching issue the market is focused on is whether the capital reserve levels required of too-big-to-fail banks will increase as a result of the David Murray’s Financial System Inquiry but, whatever happens on that front, CBA is the best-placed bank to deal with it. Of 38 banks in the world with more than $700 billion in assets, CBA ranks the fourth-highest, holding so-called "tier one" capital worth 12.1%. of total assets (Westpac is seventh at 11.3%, while ANZ and NAB are equal 13th at 10.5%).
The big banks have complained about carrying too much lead in the saddlebags, but Narev was exceedingly polite about the inquiry today: “I do think the panel is still in listen and find out mode … it’s too early to read as to whether changes are going to be insignificant, material or very material, but I do think the panel is coming at it the right way.”
Narev passed over the Commonwealth Financial Planning scandal, saying only that he expected flawless execution of the open advice program, and no figures were provided in the accounts for the possible compensation to victims who are still registering … the exposure is not deemed material.
And that’s the point: when a bank has $705 billion in loans out, revenues of $44 billion, and a profit of almost $9 billion with costs falling, it is hard to conceive of a threat to its business.