CBA posts 7% fall in cash earnings, sees slowing credit growth
By a staff reporter, with Reuters, AAP
Commonwealth Bank of Australia Ltd's (CBA) full year cash earnings have declined seven per cent to $4.42 billion as a result of increased impairment expenses during the year.
CBA said it sees positive economic signs, but predicted a decline in overall credit growth throughout 2010 and said the bank's outlook remains uncertain.
"The Australian economy has been more resilient than many had predicted a year ago and it is pleasing to see that there is some evidence of the beginnings of an economic recovery and improvements in business and consumer confidence but there are still significant risks on the downside," CBA chief executive Ralph Norris said.
CBA's cash earnings for the 2009 financial year fell seven per cent to $4.415 billion, while statutory net profit - which includes a net $612 million gain on the acquisition of Bankwest - fell one per cent to $4.723 billion.
The bank reported strong capital, liquidity and funding, and said it maintained its conservative provisioning.
The bank's long term credit ratings with Standard and Poor's and Moody's investor Services was reconfirmed at AA and Aa1, respectively.
Mr Norris said the group was emerging from the global financial crisis in a strong position.
"We are one of only a handful of banks globally which has retained its AA rating," he said.
CBA declared a final dividend of $1.15 a share, bringing the full year dividend to $2.28 - down 14 per cent on 2007/08.
The Sydney-based lender said that capital remained strong, and its Tier One ratio was at 8.07 per cent.
Mr Norris said the bank would continue to adopt a cautious approach to managing credit and market risk, given that economic conditions were likely to remain challenging in the 2010 financial year.
"The 2009 financial year has been a challenging one and the outlook remains uncertain," he said.
" ... Overall credit growth in Australia is expected to slow through 2010 and economic conditions are likely to remain challenging for the group and many of its customers in the coming year."
CBA, which bought Western Australian lender Bankwest and one-third of Aussie Home Loans last year, said the acquisition had led to a one-off net gain of $612 million because of the substantial discount of the purchase to the bank's book value.
The bank said a significant increase in impairment costs had affected margins and profitability across its retail, business and private banking divisions, as well as the institutional banking and markets units.
In institutional banking and markets, cash net profit fell 78 per cent to $166 million because of bad debt expenses, while in business banking, cash net profit rose just two per cent to $736 million.
Retail banking generated a 10 per cent increase in cash net profit to $2.1 billion, as the impairment impact was offset by strong sales and volume growth.
CBA said its funds management business suffered owing to the substantial pressure on investment markets caused by the financial crisis, though market conditions had improved in the last quarter.
The underlying net profit of the wealth management business fell 35 per cent to $514 million, as funds under management fell nine per cent to $169 billion as at the end of June. Cash net profit dropped 61 per cent to $286 million, mainly as a result of unrealised mark to market losses from widening credit spreads on asset valuations, and the impairment of listed and unlisted investments.
CBA also announced plans to raise at least $700 million through a hybrid issue to improve its Tier 1 capital ratio, which at 8.07 per cent is the lowest among the top four banks, implying it has a relatively weaker balance sheet.
"We see this result being well received, given the strength of the headline versus consensus, underlying result quality and the subdued expectations implied in the share price coming into the result," Credit Suisse said in a note to clients.
Cautious outlook
CBA chief financial officer David Craig told journalists the bank would remain cautious.
"While it's pleasing to see green shoots, we haven't seen the end of the bad news," he said.
Mr Craig also said that household arrears were still gradually increasing and medium-sized businesses of between $20 million and $100 million were having some trouble.
"It's too early to declare victory on that one," he said of bad debts and impairment charges.
However, he said "impairments are still well below levels seen in the last recession."
Mr Craig also said upward pressure on interest rates was increasing and continuing, now that market participants were starting to price in official cash rate rises by the Reserve Bank of Australia (RBA).
Chief Ralph Norris, meanwhile, indicated that the bank's next chief executive is likely to come from within when he retires from the role early next year.
He said the board had great talent and options from which he hoped a successor would be selected.
Rates
Mr Norris also said Australia's largest home loan lender would adjust mortgage rates as necessary based on funding costs.
"I don't thing there's any doubt that we will continue to reprice where necessary," Mr Norris said told analysts in a briefing on Wednesday.
"We've got to act on a commercial basis and certainly what is right for the business and if we need to reprice we will reprice."
Storm Financial
The bank also blamed lending practices to Storm Financial clients, which partially caused some people hardship, on some employees in Townsville who didn't follow company policy.
"It wasn't a failure of the bank's risk systems, it was a failure of some people who didn't follow policy," chief executive Ralph Norris told journalists after the bank reported its annual results.
"We have addressed those issues."
Market response
Market analysts welcomed CBA's profit result as an indicator of the relative strength of Australian banks, but Macquarie Equities' Lucinda Chan echoed CBA's caution about bad debts.
"All this (economic) stimulus is probably temporary. There's probably still a risk of bad debts in Australia from personal debts. Maybe you'll see that ahead," she said.
Australian banks have largely escaped the rout suffered by their global peers, helped by the Australian government's $52 billion stimulus package and guarantee on wholesale funding.
But rising unemployment and a slowdown in growth after 17 years of expansion have seen bad debts piling up at the lenders.
CBA shares have gained 52 per cent so far this year, outpacing a 34 per cent rise in the six-stock banking sub-index.
Michael Heffernan, market strategist at Austock Group, said CBA's result was fairly consistent with market expectations.
"It's pretty much in line with what the market had been anticipating. A seven per cent fall in this environment is a pretty good effort. There's no surprises on the dividend cut.
"The market has had a very strong run up in CBA shares in the last couple of weeks, so because the result is pretty much in line, I'd expect it maybe to fall back a bit today."
CBA shares regained some ground during the session, after slipping 0.2 per cent at the open to $43.85.
CBA's shares closed 3.16 per cent stronger at $44.32.
To read Tony Boyd's commentary in CBA click here.
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