CBA to hand down bumper $9.5bn profit

Commonwealth Bank, the nation’s biggest lender, will this week report a record $9.5 billion annual profit.

Ian Narev, chief executive officer of Commonwealth Bank

Commonwealth Bank, the nation’s biggest lender, will this week report a record $9.5 billion annual profit, intensifying the heat on the sector after failing to pass on the Reserve Bank’s full rate cut to mortgage holders.

CBA’s result on Wednesday, one of the most closely watched of this month’s reporting season, will reveal the extent of the pressure on margins, funding costs and returns that the big banks argued required them to pass on only half of the RBA’s cut.

“In light of recent rate cuts and repricing, we expect margins to remain a key focus,” JPMorgan analyst Scott Manning said of CBA’s result, expected to be headlined by a 3.8 per cent rise in cash profit to $9.486bn.

Amid fears for dividends after ANZ cut its interim payout, CBA is expected to hand shareholders a $2.22 final payment, flat on last year and taking the annual dividend to $4.20.

Second-tier lender Bendigo and Adelaide Bank will today provide a curtain raiser with its full-year results — a cash result of $434m is expected.

Despite CBA’s massive profit — by comparison, global financial services behemoth Macquarie makes about $2bn a year — the bank may report the slowest profit growth since the global financial crisis as it faces challenges including tightening regulation, slowing credit growth and higher bad debts.

Another headache in recent months has been political scrutiny, which spiked last week when CBA and rivals ANZ, Westpac and National Australia Bank held back 11-15 basis points of the RBA’s 25 basis point cut to the cash rate.

While the banks continued to avoid a royal commission into their conduct, Prime Minister Malcolm Turnbull reacted to the latest controversy by announcing the banks’ CEOs will be called to appear before the House of Representatives standing committee on economics at least once a year.

CBA’s results will mark the first public comments by chief Ian Narev since the bank passed on a 13 basis point cut minutes after the RBA’s decision.

CBA and rival banks also hiked 12 to 36-month term deposit rates, but the RBA on Friday shot down suggestions this would have a major impact on margins by claiming these products made up less than 2 per cent of the banks’ funding.

According to Morgan Stanley, only about $35bn of CBA’s $140bn of term deposits are for more than one year, with the more generous interest rates lopping three basis points from the group’s net interest margin.

But the hit could rise to 8 basis points, depending on moves in other deposit products.

Including the margin boost from CBA’s mortgage and business loan repricing, Morgan Stanley believes the bank’s NIM will be negatively affected overall due to the more expensive deposits and the lower official cash rate.

Neil Margolis, a fund manager at Merlon Capital Partners, said the extent of the margin blow over time would depend on whether the banks quickly withdrew the term deposit increases once the political storm died down.

“(Repricing mortgages) is supportive, but they’ve given it all back on term deposits so it’s whether that’s permanent,” he said. “(But) the net benefit will only come if the term deposit increase is tactical, which is what I think it will be.”

Mr Margolis bought back into the banks following the slump in share prices this year, with CBA hitting a low of $70.14 in February compared to $76.15 on Friday.

He said while competition for new mortgages and the greater use of brokers to win customers was hurting margins, the big four’s more than 80 per cent market share of the industry and relatively strong capital levels were appealing.

Morgan Stanley analyst Richard Wiles said CBA could report a disappointing result led by weaker than expected revenue growth and margins, elevated growth in costs and higher bad debts.

Broker Morgans on Friday increased its second-half impairment charge forecast by $72m to $797m, betting CBA would recognise its loan exposure to troubled coalminer Peabody as impaired.

“Key areas of focus are the capital position, margin trends, the outlook for cost growth, retail banking momentum and the institutional bank’s return profile,” Mr Wiles said. Dividends will also be looked at after Perpetual portfolio manager Anthony Aboud recently labelled the banks’ payouts “simply unsustainable” as CBA, Westpac and NAB pay out more in dividends than they generate in organic capital.

Operationally, CBA’s institutional bank will be scrutinised after the division’s 19 per cent loan growth in the first half.

UBS’s Jonathan Mott recently warned that CBA was strangely expanding into institutional lending “at a time when every other major bank is shrinking”. He said offshore institutional lending would lead to higher bad debts, singling out CBA’s exposure to failed British company First Oil as a “worrying sign”.

“What was the strategic rationale of an Australian bank lending to a North Sea Oil company?” he said.

“We do not believe institutional lending outside CBA’s key markets of Australia and New Zealand is the best use of shareholders’ money.”

Citi analyst Craig Williams said CBA’s results shouldn’t feature further “large credit surprises”, pencilling in second-half loan losses of 23 basis points of gross loans. “This should leave CBA’s result in line with market expectations on the back of strong asset growth and mortgage repricing that will ensure that both revenue and core profit stay at about 6 per cent,” he said.