Terry McCrann: Commonwealth Bank’s post royal commission figures are pretty good

So this is the “new normal” for profit at our big banks? Or more specifically, the “new normal” for our biggest and “baddest” bank? Well knock me over with a feather. It all looks pretty good, writes Terry McCrann.

This is the post-Hayne “new normal” for the big four banks and at least for the biggest — and, some might say, baddest — the CBA, the “new normal” looks pretty good.

Sure, it’s nowhere near as lush as in the good (and bad-behaving?) days when the CBA was the standout performer, earning as much as a lush 20 per cent return on shareholder capital. Wednesday’s was 12.5 per cent.

But 12.5 per cent — and indeed, likely a little higher going forward, now that most of the costs of Hayne have washed through, and when and if interest rates go higher — looks pretty good in the wake of both the direct costs of Hayne and the ongoing business impacts.

The direct costs are the $2.2 billion in remediation payments and costs over the past two years.

But for the $1 billion that hit the latest result, CBA would have been reporting a 3 per cent profit rise rather than a near 5 per cent fall.

Kenneth Hayne, who presided over the financial services royal commission, with federal Treasurer Josh Frydenberg. Picture: Kym Smith

Which, incidentally, makes some of the analyst shock at the result being a “nasty miss” as it fell $100 million shy of consensus look not just silly but embarrassingly stupid. That’s $100 million out of $8400 million, or barely a touch over 1 per cent. Some “miss”.

And the share price movement through Wednesday pretty much confirmed this. After falling as much as $2.33 in early trading, the CBA share price recovered to close down $1.10 on the day.

There are also the ongoing costs of Hayne — getting out of the advisory and associated other “wealth” business changes. CBA said these — essentially cutting or eliminating various fees — were now saving customers $415 million a year and ongoing.

But most of all, that 12.5 per cent also looks — considerably more than — pretty good in the much broader “new normal” of near zero interest rates right across the yield curve. You now can’t even get 1 per cent on a 10-year Commonwealth bond compared to the 12.5 per cent return on CBA equity.

Investors were getting many multiples of 1 per cent on a bond when the CBA ROE was up around 20 per cent.

Now Hayne and globally low interest rates (and the reality of low single-digit nominal economic and business growth rates) aside, the banking environment remained pretty good right across the financial year.

And CBA took full advantage of its competitive strength. Two figures captured this rather neatly.

In the latest half CBA grew its home lending at a rate 30 per cent above its share of the home loan market, up from growing just below share in the December half and significantly below share in the June 2018 half.

That means the other three big banks were, collectively, significantly underperforming with their aggregate home loan business — which is not only the basic driver of any down-under bank, big or small, but also easily the most profitable and the least risky business area.

The second was the 9 per cent leap to $169 billion in transaction deposit balances.

Yes, this is very much a two-edged sword. Yes, CBA might bleat a bit that theses deposits make it tough to maintain interest margin when rates are coming down — it can’t cut the interest paid on them as it is already at zero.

Commonwealth Bank chief Matt Comyn has revealed some healthy figures. Picture: AAP

But that is still precisely the point. CBA has this huge sum — far, far bigger than any of its peers on which it does “pay” zero interest; and critically, on which its customers do not grudge the absence of interest.

The size of this deposit hoard shows two — good for CBA — things.

The first is customer confidence in CBA. The second is that they rose because CBA opened a big swag of new transaction accounts — crucially linked to its market-leading, real-time operating systems.

So it is building in more future profit-generating business. It is at the same time getting a lot of money (customer-willingly) interest free.

Despite the somewhat hysterically alarmist reporting in some quarters, the CBA numbers did not show signs of a major deterioration in credit conditions and so the economy.

Yes, troublesome and impaired assets ticked up by $1 billion in the half — but the total is still just 0.72 per cent of total assets.

And that was the worst of the various credit metrics All the others edged higher but to still extraordinarily low levels.

Actual loan losses remained at near record low levels and, for example, were at a rate barely one fifth of losses in 2009 — the worst of the post-GFC years.

Further, very importantly, this was all averaged over the whole June six months. CBA CEO Matt Comyn confirmed there was no discernible negative trend developing through the six months.

Even more tellingly, there was no sign of deterioration through July, into the new year.

More broadly, this just adds to the puzzle of where exactly the economy is — and where is it heading.

In sum, the CBA has effectively gone back to a 1990s future.

The “new” CBA is a lot like the old CBA: A purer bank, but with 2019 digital real-time bells and whistles.

TRANSURBAN GOES TO MONTREAL

Bonjour citoyens — et citoyennes — de Montreal: Welcome to the Transurban “family”.

You have a “big”, a very big, “future” ahead of you.

A “future” of paying more and more and ever-rising tolls.

MORE TERRY MCCRANN

As in the birthplace, Melbourne, it starts small and grows.

Transurban’s bought a small road in Montreal — the giant steps, the tolling bear-hug, will come inexorably.

In the quarter they paid just $16 million; we paid $202 million. Although, we might have to pass around the hat for Transurban. Its gross margin on CityLink plunged from 88.2c in the revenue dollar to, wait for it, 88c.

That’s almost the breadline.