Commonwealth Bank half year cash profit falls 4.3pc, beats expectations

Commonwealth Bank of Australia has reported a better-than-expected $4.48bn interim profit.

Commonwealth Bank’s half-year profit has beaten analyst expectations. Picture: AAP

Commonwealth Bank of Australia has reported a better-than-expected $4.48bn interim profit, buoyed by higher net interest income which offset lower fee revenue and a $100m hit from bushfires and drought.

Net cash profit from continuing operations fell 4.3 per cent for the six months ended December 31, from the same period a year earlier, the nation’s largest home lender said in an ASX statement.

Analysts were expecting the profit result to be about $4.37bn. The first-half dividend was $2, flat on the interim payment in 2019.

On the outlook, CBA chief executive Matt Comyn said the Australian economy was “underpinned by good long-term fundamentals”.

“Our population continues to grow, we have a strong trade and fiscal position, and a solid pipeline of infrastructure investment provides ongoing stimulus. Recent improvements in key indicators also demonstrate the economy’s resilience, including growth in employment and the rebound in housing,” he said.

But Mr Comyn cautioned of “uncertainties” remaining in the global economic outlook, including the threat of the coronavirus, and said CBA was mindful of the impacts of drought and bushfires. “Against this backdrop, we are focused on investing in our core businesses and on continued execution. We have both the capacity and the appetite to lend more to support our customers and the economy.”

Commonwealth Bank CEO Matt Comyn. Picture: AAP

CBA’s home lending rose 4 per cent in its first-half compared to the same period a year earlier, outpacing the industry average. Business lending increased 3 per cent.

The bank’s shares climbed 4.1 per cent to $88.18 on Wednesday as investors cheered the result and sent the stock close to a five-year high.

Bell Potter analyst TS Lim said the CBA result “shot the lights out” compared to market expectations and against the background of a still-challenging operating environment.

“This is a back-to-basics bank with ongoing spend on innovation to retain its IT leadership, miles ahead of the others in our view,” he said. “Capital (is) strong, no issue about dividend sustainability – so rest easy, folks who like steady dividends.”

But Macquarie Group banking analysts pointed out that CBA’s better-than-expected result was mainly due to lower customer compensation charges.

They said investors would “take confidence” in the edging up of the bank’s net interest margin, which reflects what the bank earns on loans minus funding and other costs.

But CBA does expect further official interest rate cuts by the Reserve Bank will spur a five basis points decline in its net interest margin in the second half of the fiscal year, and a four basis point drop in 2021.

Tough operating conditions saw CBA’s loan impairment expense come in at 17 basis points of gross loans, including the impact of the bushfires and drought, up two basis points.

The bank also flagged a $500m dividend reinvestment plan and said the board was giving “active consideration” to capital management. Analysts expect CBA to announce a share buyback or special dividend with its full year results in August.

CBA’s capital position was bolstered by the sale of its global asset management unit and an initial payment from the divestment of its life insurance operations. The common equity tier one ratio was reported at 11.7 per cent, well above the banking regulators “unquestionably strong” requirement of at least 10.5 per cent.

CBA’s customer compensation and program costs edged up slightly to $2.2bn, up from $2.17bn six months earlier.

The bank reported “good progress” on repaying customers, with $630m refunded as at December 31. CBA said it had initiatives for 23 applicable recommendations from the Hayne royal commission underway

But CBA warned that assessment of potential remediation in its aligned financial advice business was continuing.

Operating income of $12.4bn was flat compared to the same half in 2019, the bank said. Operating expenses grew 2.6 per cent to $5.4bn.

“Non-interest income was down 4.6 per cent, largely due to the impact of bushfire related claims of $83m on insurance income, the removal and repricing of certain wealth management fees, and a realised loss on the hedge of New Zealand earnings,” the bank said in a statement.

CBA’s net interest margin (NIM) grew one basis point to 2.11 per cent thanks to a lower risk basis and higher asset prices, but was offset by lower earnings from deposits and capital as the results of low interest rates.

“The lower cash rate will continue to impact NIM as the benefits of the equity and deposit hedges run off. We expect that previously announced cash rate reductions will negatively impact Group NIM by 5 bpts in 2H20 (vs 1H20), 4 bpts in FY20 (vs FY19), and by another 4 bpts in FY21 (vs FY20),” the bank said.