Commonwealth

For most of this year, the hearings of the banking royal commission and the allegations against the Commonwealth Bank have been among the most headline worthy. The bank’s senior management and much of its board have been turned over as a response to these claims and the Austrac money laundering scandal. The combination of these problems have led to a spate of gloom and doom articles about the poor outlook for banking generally, weak earnings and bad news for shareholders — sending share prices lower until late June when they turned up as the end of the financial year (for the CBA) approached.

The real story is that the CBA has sailed through this turbulence with very little lasting damage. Shareholders have been kept sweet with a small rise to a record high for their dividend of $4.31 a share, as well as a sharp turnaround in the share price since mid June. The rebound in the shares and the bank’s solid 2017-18 financial performance underscores all those concerns about CBA and its peers being like cockroaches — able to survive the financial equivalent of nuclear war.

As usual some (not all) investors got it right (the ones who got it wrong were the sellers). For example, the CBA’s shares fell 12% in 2017-18, but in the June quarter they rose 0.7% and were up 6% in the month of June (which lifted the overall market). The most recent low was on June 14 when the shares fell to $67.50. Since then they are up 8% and closed at $72.89 on Tuesday. The ASX 200 is up just on 2% in that time — a clear outperformance by a stock supposed to be under pressure.

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The release of the 2017-18 annual profit today confirmed that outperformance — ignoring some businesses are being sold and the $700 million “fine” from the settlement of the Austrac case, the Commonwealth reported a cash profit down 4.8% to $9.23 billion — not too shabby indeed. But the results disclose the extent of the bank’s “pain” from all those disclosures at the royal commission and the bad publicity from the Austrac case.

The CBA’s key measure is its net interest margin — it rose five points to 2.15 cents in every dollar of income. It was 2.10 cents in the dollar in 2016-17 and supposedly under more downward pressure. That rise came from the ending of the fixed-term home lending boom which saw the CBA (and other banks) improve their profitability by lifting interest rates to a lot of home loan borrowers, especially those moving from fixed to variable rate loans. That’s why revenue was up 2.6% to $25.9 billion.

The bank’s return on equity was 14.1% — down 160 points reportedly due to one-off regulatory costs of $155 million associated with the royal commission, the AUSTRAC civil proceedings and the APRA Prudential Inquiry into CBA. But that return is still ultra-high at a time when the official cash rate is 1.50%. That’s a sign of the bank’s continuing strength and its ability to ride out the impact of the royal commission, any change to lending or other activities and the poor publicity from the Austrac case. And finally this enabled the bank to keep shareholders sweet. Final dividend was lifted one cent a share to $2.31 after the interim, making for a record total for the year of $4.31 a share.

Remember they were the ones who were going to suffer according to numerous articles in the business pages and on TV.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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