Commonwealth Bank Racks Up Another Record Profit -- Update

By Robb M. Stewart Features Dow Jones Newswires

MELBOURNE, Australia--Commonwealth Bank of Australia Ltd. (CBA.AU), Australia's biggest bank, reported another record full-year profit as lending remained strong and loan-impairment costs slipped.

Continue Reading Below

Ian Narev, chief executive of the Sydney-based bank, said headline indicators showed the Australian economy remained sound overall, although many households are concerned about job security, wages and the cost of living.

Businesses have the balance-sheet capacity to support the broad-based business investment needed to secure jobs and lift wages, yet global caution remains high due to geopolitical change and less-expansionary monetary policy, he added.

Commonwealth Bank, the largest lender by assets and market value, reported a 7.6% rise in net profit to 9.93 billion Australian dollars (US$7.86 billion) in the 12 months through June from A$9.22 billion the year before. The performance marked an eighth consecutive rise in annual profit for the bank.

Cash earnings, a measure followed by analysts that strips out certain costs and one-time items, were 4.6% higher at A$9.88 billion, ahead of the A$9.79 billion median of 10 analyst forecasts compiled by The Wall Street Journal.

Commonwealth Bank's performance is viewed by some as an economic bellwether since it sells more home loans than any of its rivals, controlling about one quarter of the mortgage market. It has enjoyed years of steady earnings growth as mortgage lending has risen sharply thanks to falling interest rates and more than two decades of unbroken economic growth in Australia. More recently, though, the industry has seen margins come under pressure from heightened competition and a rise in funding costs as well as rising political and regulatory risk.

Continue Reading Below

The bank's result was released under the shadow of allegations it breached money laundering laws by failing to make timely reports of transactions through its automated teller machines that allegedly opened the way for money laundering. Earlier this week, the bank said a coding error led to the vast majority of the tens of thousands of instances of it failing to provide transaction reports on time, dating back to 2012 when it rolled out its "intelligent deposit machines." The board this week decided to ax short-term incentives for Mr. Narev and senior managers in the just-ended year to reflect their collective responsibility for the bank's reputation.

Commonwealth Bank's loan impairment expense dropped by 13% for the year to A$1.1 billion, or 0.15 percentage point of gross loans and acceptances. The bank notes that personal-loan arrears were elevated in Western Australia and credit-card arrears were seasonally higher in the second half of the financial year, but home-loan arrears remained at low levels overall.

Its net interest margin, a profit measure based on the difference between the rates at which a bank borrows and lends, narrowed by 0.03 percentage point to 2.11% but was flat between the first and second half. Commonwealth Bank and the country's other lenders recently again raised mortgages rates, despite the central bank's benchmark cash rate holding steady at a record-low 1.5%, as they have responded to regulatory demands to cool riskier lending to property speculators.

The bank's common equity Tier 1 capital ratio stood at 10.1% at the end of June, down from 10.6% a year earlier, while on an internationally comparable basis it was 15.6%. The prudential regulator in July said the major banks needed to lift their capital ratios to at least 10.5% by 2020 to ensure they can withstand future crises.

Commonwealth Bank plans to pay a final dividend of A$2.30 a share, up from A$2.22 last year and bringing the full-year payout to A$4.29. The bank said its financial performance supported the board's aim of stable dividends.

Write to Robb M. Stewart at robb.stewart@wsj.com

MELBOURNE, Australia--Commonwealth Bank of Australia Ltd. (CBA.AU) reported an eighth consecutive rise in its annual profit to a fresh record and lifted its dividend payout as it moved to shake off the scandal of alleged compliance breaches that opened the door to money laundering.

Earnings for the financial year were modestly ahead of expectations, driven by continued mortgage and business lending and relatively low bad-debt charges. The bank also flagged a possible exit from its life insurance businesses in Australia and New Zealand and said it was offering a discounted dividend-reinvestment offer as it seeks to build capital to meet a new regulatory benchmark.

Like its peers, Commonwealth Bank faces a lower revenue-growth environment in Australia as home prices show signs of peaking after booming in recent years and the wider economy adjusts to the fall-off in mining and construction investment that had driven expansion. There has also been heightened regulatory and political pressures on the industry, as the central bank and prudential regulator have sought to cool property speculation and soaring household debt, and Canberra introduced a tax on the biggest lenders' liabilities to help close a budget deficit.

Ian Narev, chief executive of the Sydney-based bank, said headline indicators showed the Australian economy remained sound overall, although many households are concerned about job security, wages and the cost of living.

Businesses have the balance-sheet capacity to support the broad-based investment needed to secure jobs and lift wages, yet global caution remains high due to geopolitical change and less expansionary monetary policy, he added.

Commonwealth Bank, the country's largest lender by assets and market value, reported a 7.6% rise in net profit to 9.93 billion Australian dollars (US$7.86 billion) in the 12 months to June 30, from A$9.22 billion the year before. Cash earnings, a measure followed by analysts that strips out certain costs and one-time items, were 4.6% higher at a better-than-expected A$9.88 billion.

Commonwealth Bank's performance is viewed by some economists as an economic bellwether since it sells more home loans than any of its rivals, controlling about one quarter of the mortgage market. It has enjoyed years of steady earnings growth as mortgage lending has risen sharply thanks to falling interest rates and more than two decades of unbroken economic growth in Australia. More recently, though, the industry has seen margins come under pressure from heightened competition and a rise in funding costs.

The bank's result was released under the shadow of allegations it breached money laundering laws by failing over almost three years to make timely reports of required transactions through its automated teller machines. Earlier this week, the bank said a coding error led to the vast majority of the tens of thousands of instances of it failing to provide transaction reports on time, dating back to 2012 when it rolled out its "intelligent deposit machines." The board this week decided to ax short-term incentives for Mr. Narev and senior managers in the just-ended year.

"We've made mistakes," Mr. Narev told investors, adding that there was no evidence the allegations stemmed from a profit motive or unethical behaviour.

The bank's shares jumped following the release of the results, in line with gains by each of Australia's major banks, as it recovered from falls after the government's financial-intelligence agency launched its civil suit against Commonwealth Bank last Thursday.

Commonwealth Bank said its loan impairment expense dropped by 13% for the year to A$1.1 billion, or 0.15 percentage point of gross loans and acceptances. It said personal-loan arrears were elevated in Western Australia and credit-card arrears were seasonally higher in the second half of the financial year, but home-loan arrears remained at low levels despite a shift higher in the country's west.

Its net interest margin, a profit measure based on the difference between the rates at which a bank borrows and lends, narrowed by 0.03 percentage point to 2.11% but was flat between the first and second half. Commonwealth Bank and the country's other lenders recently again raised mortgages rates in response to regulatory demands to cool riskier interest-only and investor lending, although Chief Financial Officer Rob Jesudason said the benefit to margins had been offset by rising business-lending competition.

The bank said it was in talks with unnamed interest parties that could see it sell its life insurance businesses, although it would also consider other alternatives including reinsurance arrangements or holding on to the assets. Several of the bank's peers have moved to exit their life insurance operations, which tend to be capital intensive and offer lower returns than the larger, core banking businesses.

Commonwealth Bank plans to pay a final dividend of A$2.30 a share, up from A$2.22 last year and bringing the full-year payout to A$4.29.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

August 08, 2017 23:59 ET (03:59 GMT)