CBA rides RBA’s ‘free money’ to $9bn profit

It’s hard to think of a better banking franchise than the Commonwealth Bank anywhere else in the world – and, boy, did it exploit its strength over the past financial year.

CBA chief executive Matt Comyn. Picture: Adam Yip

The Commonwealth Bank has easily the best banking franchise in Australia – indeed, it’s hard to think of a better one anywhere else in the world – and, boy, did it exploit its strength through the turbulence and ‘free money’ of a Covid-shaped 2020-21 financial year.

The end product was that near-$9bn profit, the return to the $2 six-monthly dividend of the pre-Covid era, and the $6bn share buyback that still left it with more capital in its balance sheet than it really needs. Covid of course permitting.

It all looked so different a year ago, when the CBA – and all the rest of us – were just emerging from the shuddering national lockdown that had sent the economy plunging to its biggest drop ever on record, and we were all staring into the unknown abyss of a long literal and virus-driven winter.

Back then CBA was putting away a staggering $2.5bn for loan losses that, as it turned out, largely never came.

This year its loan loss provision is just $554m.

That has quite literally made all the difference to the profit bottom line.

Its actual operating profit before the loss provision was almost exactly unchanged.

The 2019-20 result had nine great months and one horror (June) quarter – and the fear of what might be coming.

The 2020-21 result was 12 months of turbulence, yes; but also the Reserve Bank’s ‘free money’ (both directly: the $51bn the RBA lent the CBA at an interest rate of just 0.1 per cent; and indirect: the RBA forcing all rates to the same near-zero) and a booming property market where the CBA really is king.

Now, all the banks had all that. But the CBA clearly outperformed.

It grew its home loans by 1.2 times system: that means it was lending at a rate 20 percent more than the rate of overall home loan growth.

And most impressively, it grew its business lending at three times system.

It was stealing market share big-time from its three big bank ‘peers’; and business lending delivers higher headline interest margins than home lending.

Its interest margin – the difference between what it charges borrowers and pays depositors – fell slightly from 207 points (2.7 percentage points) to 204 points.

But that was not the CBA playing nice to customers – paying depositors more or charging borrowers less – but entirely the product of having too much cash sitting in its balance sheet earning zip.

CBA chief executive Matt Comyn. Picture: Adam Yip

Yes, the CBA faced exactly the same problem its depositors did: just as it wasn’t paying you much above zero on your deposits, nobody would pay it much above zero for the billions it had to deposit.

Although, don’t shed any tears for the CBA, or indeed any of the banks.

Few of you would have had a friendly RBA lending you billions and charging you just 0.1 per cent interest.

The bottom line was though, still very juicy.

The CBA was getting much of its money at that 0.1 per cent and rates not much higher, while lending it out at 2 per cent – and points higher – on home loans, and at considerably higher rates than that to SME business borrowers.

So its average raw interest rate margin – measured only on actual loans – remained much higher than the 2.04 per cent across its entire balance sheet.

So when we got to the end of the year, the balancing trick was to disperse the excess cash that would drag performance – the dividend and the $6bn share buyback – while being sufficiently prudent into the uncertainties, both economic and viral, into 2022.

Plus of course both preparing for and developing internally into all those structural waves like AfterPay which are still coming at the trad banks, Covid or no Covid, and indeed have been accelerated by things like lockdowns.

Originally published as CBA rides RBA’s ‘free money’ to $9bn profit