CBA Quarterly Update

As the last of the big four banks, Commonwealth Bank of Australia (CBA) released its quarterly update today. CBA operates on a slightly different financial calendar to the other 3 big banks and this is just an update with a summary, not interim/half year results.

Profit and Earnings
Unaudited cash earnings for the quarter ending March 31 were approx. $1.7 billion. This would put profits at close to $5 billion year to date – which means CBA is on track to beat last years profit of $6.1 billion.

Lending
CBA reports that “subdued credit demand” reflects a lack of business and consumer confidence. No real numbers have been published that reflect what this means to CBA’s bottom line. Probability points to flat growth in lending overall.

Funding/Capital Ratio
Like its four pillar brethren, CBA increased its reliance upon customer deposits whilst reducing reliance on wholesale (mainly foreign) funding in the quarter. Total composition of funding as deposits is now a very robust 61%. This is likely to grow higher if the banks pass on increased cash rates from RBA rate rises.

Tier 1 ratio improved by 19 basis points or 9.9 percent, roughly in line with the other banks.

Arrears/Provisions
CBA also reduced its total impairment expense to $300 million in the quarter, or “only” 24 basis points of total average loans.

A closer look at the arrears rates show that over $2.8 billion in residential mortgages are now 90 or more days past due. This is a deterioration of 11% from the previous quarter, where only (sic) $2.5 billion were in a similar predicament. This is in line with other banks – but remember CBA has a larger proportion of residential mortgages on its balance sheet than anything other institution.

Corporate impaired assets reduced overall, probably due to foreclosures, but 90 days arrears have jumped by almost 20%. Other retail loans are also up some 20% whilst provisions have not changed.

Other Divisions
Notably, CBA’s Wealth Management division only increased Funds under Administration by 0.2% for the quarter – barely 1% annualised growth. Insurance grew their premiums, although updates on the floods and cyclones were not fully disclosed.

Forecasts
CEO Ralph Norris was cautious, but relatively upbeat in CBA’s future potential:

Whilst the Australian economy continues to perform relatively well, consumer and business confidence remains fragile, resulting in subdued spending patterns and muted system credit growth.

Notwithstanding present challenges, we continue to expect a gradual improvement in operating conditions through calendar 2011, as the economic recovery strengthens and system credit growth rebounds.

Summary
Another “boring” result for what is a highly concentrated business reliant upon continued growth in residential mortgages. Arrears are up noticeably quarter-on-quarter, although remains only a small part of the balance sheet. However, if this “growth” does not abate, CBA may have almost $4 billion in mortgages in arrears by the end of the calendar year, or well over half of annual profit.

CBA’s current dividend yield of 5.8% and P/E ratio of 12.75 will likely entice investors and institutions will continue to make CBA a large part of their portfolio, but risks remain that the growth phase for banks is over.

Empire Investing will release full valuations of the big four banks in a future post with updated earnings and other metrics covered.

Disclosure: The author is a Director of a private investment company (Empire Investing Pty Ltd), which has no interest in any business mentioned in this article. The article is not to be taken as investment advice and the views expressed are opinions only. Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

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