As good as it get for CBA?


From the AFR:

In the biggest full-year profit for an Australian bank, Commonwealth Bank has delivered a cash profit of $8.68 billion, up 12 per cent, as it grew market share in home and business lending and bad debts remained at very low levels. The result came in a touch above analyst consensus estimates for a $8.64 billion full-year profit.

CBA will pay a $2.18 final dividend to take total dividends for the year to $4.01, up 10 per cent at a full year payout ratio of 75.1 per cent.

Chief executive Ian Narev said the bank was “cautiously positive” about the outlook for financial 2015.

“Whilst business and consumer confidence levels have remained fragile, the levels of underlying activity confirm the strong foundations of the Australian economy,” he said in a statement accompanying the results.

And more detail from Watermark via the SMH blog:

  • Capital was the key stand out from the result, with CBA increasing its CET1 ratio by 110bps in FY14. This implies very solid organic capital generation even after accounting for the 28bp contributions from the property transactions.
  • The 2H14 DPS was 2% lower than consensus expectations. CBA has announced that they intend to neutralise the DRP, which is in contrast to what they did at the first half result in February. WBC is also neutralising its DRP currently while ANZ and NAB are not.
  • ROE has come in a little bit lighter at 18.3% vs. consensus expectations of 19.0%
  • NIM outcome was pleasing given the building competitive pressures in lending, with NIM 1bp higher in FY14 and flat in 2H14. FY14 NIM was 1bp higher than consensus and 2H14 NIM was 3bp higher than expected.
  • Bad debt charges have modestly increased in the half to 17bps in 2H14 from 16bps in 1H14. This seems to suggest we might have passed the sweet spot in the asset quality cycle and that bad debt charges could start to tick up marginally from here for the industry.

I expect things will begin to get more difficult from next year as the mining cliff and slowing house prices push up bad loans. We are already seeing it at the margin, from Banking Day:

Standard & Poor’s released its residential mortgage-backed securities arrears data for the month of June yesterday…

Looking at the change in sub-prime arrears since the end of March, arrears greater than 30 days have fallen as a percentage of the face value of subprime RMBS outstanding to 4.6 per cent from 5.4 per cent.

However, this disguises an 8.6 per cent increase in the dollar value of arrears to A$140.4 million, as the face value of sub-prime RMBS has increased by more than $650 million to almost $3.1 billion.

Of more concern is a 13.5 per cent increase in the dollar value of arrears greater than 60 days and a 12.7 increase in arrears greater than 90 days. These increases are hardcore and not just a temporary slip in making mortgage repayments.

More sub-prime borrowers are getting into difficulty and are in danger of losing their homes. 

The same applies to some prime borrowers. In the case of prime RMBS, arrears since the end of March appear to have remained steady at 1.2 per cent of total RMBS, including internal securitisations. But analysis of the underlying numbers shows that arrears greater than 30 days have increased by four per cent to $1.4 billion.
Again, it is the greater than 60 days and 90 days buckets that have increased the most, at 4.8 per cent and 8.2 per cent respectively.

There is also the big regulatory risk brewing in the Murray Inquiry which appears determined to rein in the big four (if not the system). My guess is this is as good as it gets for profit growth and payout ratios.


It seems MB has a fan in Karen Maley:

Houses and Holes
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  1. Seriously, who but the most cynical would have thought that after the GFC voters would have given their leaders total freedom to not just bail out the banks at the tax-payers expense, but put in place the conditions to load the public up with even more private debt and make the banking executives rich again.

    The last few years have taught me a great deal about the practical application of ethics.

    • I don’t recall anyone asking. They did it because they had the power and they could. In fact I recall a few statements along the lines of there being no bailouts and no financial repression.

      All BS. Few dispute that some response was necessary, but when it comes to the crunch they will do as they please all the while crying things like “budget emergency”.

  2. As good as it gets…at least until the next dose of monetary stimulus.

    Second half profit growth slowed sharply. Total operating income didn’t grow in the second half. Another fall in loan impairment over the year helped…although again the second half saw a pick up.

    It’s been a year now since the banks had a sugar hit.

    • a year since a hit?

      The banksters have been mainlining high fructose ZIRP syrup non-stop for the last 12 months

      • well, a year since the RBA injected fresh reserves into the commercial banking system, which is a primary rush for the banks. And that was the tail of the stimulus…the majority came in 2012.

        Yes, cheap foreign gear is maintaining the high, through the nose, if you will. The RBA provides the good stuff, straight into the vein.

        That’s why you’re seeing housing prices potentially topping out. Studies have shown that house prices usually fully respond to changes in interest rates within 12-18 months. After that, they need more.

        The CBA (and other banks) have been tweaking all the levers at their disposal for years to generate such strong growth. The tailwinds have been exceptional…and lower NPL’s have provided a big boost to the bottom line.

        Can they keep this up? Not without another interest rate cut.

  3. Given the current favourable conditions for banking and housing (an important market segment) I would expect the CBA to improve on this next year, and maybe the year after, but then slow down some in 2016 as lending slows.

    • It’s not just an important market segment Peter, it is pretty much becoming THE market segment. Incentivising housing development is the only way forward from here.

      In short, I agree.

    • Yes, housing is an important market segment. Reason being that it represents an intrinsic human need, as opposed to the manipulated profit driver of financial institutions it has become.