Commonwealth Bank earnings jump amid strong lending growth

Commonwealth Bank is well placed to start returning more than $10bn in excess capital to investors.

CBA CEO Matt Comyn is provided a quarterly update to investors on Wednesday. Picture: Adam Yip

Commonwealth Bank is well placed to start returning more than $10bn in excess capital to investors, after strong lending growth and lower pandemic-related loan impairments delivered a jump in third-quarter earnings.

CBA chief executive Matt Comyn said he expected the bank’s capital management plans would be an “area of focus” for shareholders at CBA’s annual profit results in August.

“It’s a topic of discussion at every board meeting and we’d expect that to continue and we anticipate it will be a key area of interest and focus for investors as it should be,” he said in an interview.

Mr Comyn signalled the bank’s strong surplus capital position “creates flexibility” for CBA’s board to assess returning capital to investors, but said the timing and size was dependent on the pace of economic recovery.

His comments came as Velocity Trade analyst Brett Le Mesurier tipped CBA would return as much as $12bn in capital to investors — by buying back shares — in two $6bn tranches in fiscal 2022 and 2023.

“The major banks have an extraordinary amount of surplus capital and CBA should be able to return $12bn to shareholders over the next two years, which would reduce its share count by an estimated 7 per cent,” he said.

CBA’s common equity tier one ratio was 12.7 per cent as at March 31, well above the banking regulator’s 10.5 per cent “unquestionably strong” requirement. That ratio — which amounts to about $10bn — will receive a another boost of up to 42 basis points as further asset sales and divestments are completed.

The bank on Wednesday said it expects the completion of the sale of a majority stake in its Colonial First State business to be delayed, due to regulatory approvals, but transaction closure should occur in the calendar year’s second half.

CBA posted a strong third quarter. Cash earnings from continuing operations climbed 24 per cent to $2.4bn in the three months ended March 31, compared to the average of the two prior quarters.

A year ago, CBA reported third-quarter unaudited cash net profit from continuing operations of about $1.3bn, as it pencilled in a $1.5bn provision for expected loan losses stemming from COVID-19.

The latest quarterly update showed CBA’s business lending growing three times the industry’s rate while home lending was tracking at about one times the sector’s rate. It led to a 1 per cent rise in the bank’s shares to $95.57 on Wednesday.

The latest CBA update follows Tuesday’s federal budget which was aimed at facilitating a sustained recovery from Australia’s first recession in almost 30 years.

The bank’s credit provisions reduced to $6.5bn from $6.8bn in the prior quarter, and it saw a positive result for loan impairment expenses over in the quarter booking a benefit of $136m.

Troublesome and impaired assets printed lower at $7.8bn.

CBA said of the 158,000, or $54bn, in home loans that received COVID-19 repayment deferrals, 81 per cent had returned to terms prior to the pandemic. Some 10 per cent were closed, 4 per cent of customers switched to interest only repayment arrangements and 1 per cent were impaired or restructured. The update noted the remaining 4 per cent required further or ongoing assistance.

“There was a small increase in home loan portfolio arrears in the quarter as the deferral program concluded and further modest increases are expected in coming months,” the bank said.

Mr Comyn said CBA was revisiting its loan provisioning levels every month.

CBA noted its net interest margin, excluding treasury and markets, benefited from higher New Zealand earnings and a “favourable funding mix” from at-call deposits growth and lower wholesale funding costs.

Mr Le Mesurier said CBA’s net interest margin increased by an estimated three basis points in the March quarter, compared to the prior six months.

Operating income rose 2 per cent buoyed by higher net interest income from strong volume growth. But operating expenses also increased 2 per cent due to greater investment spend and customer compensation.

The bank’s three main rivals reported markedly higher first-half profits earlier this month.

That occurred as the risk of ballooning loan losses linked to COVID-19 receded and Westpac, ANZ, and National Australia Bank benefited from strong housing demand and lower funding costs.

Those three banks have a September 30 year end, whereas CBA rules off its year on June 30.

In February, CBA delivered a 53 per cent rise in its interim dividend, despite a drop in first-half cash profit.

CBA shares closed up 1.1 per cent, at $95.57, against falls of more than 1 per cent for each of its big four rivals.