The Commonwealth Bank of Australia announced its results for the half year ended 31 December 2014 today. The Group’s statutory net profit after tax (NPAT) for the half year ended 31 December 2014 was $4,535 million, which represents an 8 per cent increase on the prior comparative period. Cash (NPAT) was $4,623 million, an increase of 8 per cent on the prior comparative period. Cash Return on Equity was 18.6 per cent. The Board declared an interim dividend of $1.98 per share – an increase of 8 per cent on 2014 interim dividend.
Revenue was up 5 per cent in subdued market conditions. The cost to income ratio improved 70 basis points to 42.2 per cent as productivity initiatives continue. Return on Equity on a cash basis was 18.6 per cent. They maintain a strong capital position – Basel III Common Equity Tier 1 (CET1) (Internationally Comparable) of 13.3 per cent.
The banks said that while some of the Group’s customers are facing challenges, this is not translating into a deterioration of credit quality. The Group is maintaining a strong balance sheet with high levels of capital and provisioning. Liquidity was $151 billion as at 31 December 2014.
Customer deposits were up $32 billion to $458 billion and represents 63 per cent of funding. During the period the Group took advantage of improving conditions in wholesale markets, issuing $18 billion of long term debt in multiple currencies.
Looking at the segmentals, the bank reported that:
- Net interest income and other banking income both grew 6 per cent, with average interest earning assets up $49 billion to $739 billion and retail and business average interest bearing deposits up $27 billion to $432 billion;
- Net interest margin (NIM) declined 2 basis points (to 2.12 per cent) on the prior half, reflecting competitive asset pricing, partially offset by lower wholesale funding costs;
- Strong growth in net interest income and other banking income and a disciplined approach to expenses contributed to Retail Banking Services cash earnings growth of 12 per cent;
- Wealth Management’s average Funds Under Administration grew by 11 per cent with 85 per cent of funds outperforming their respective three year benchmarks;
- Cash earnings in New Zealand (excluding the impact of lower losses associated with the New Zealand earnings hedge) grew 15 per cent and in Bankwest grew 8 per cent respectively;
- The Group’s cost to income ratio improved by 70 basis points, in large part due to the on-going productivity focus, which delivered savings of $312 million over the past twelve months;
- The annualised ratio of loan impairment expense (LIE) to average gross loans and acceptances improved 2 basis points and 3 basis points (to 14 basis points) compared with the prior comparative period and the prior half respectively;
- Investment in long term growth continued, with $595 million invested in a set of initiatives, including $167 million for risk and compliance related projects, with the balance invested against on-going strategic priorities;
- Provisioning remained conservative, with total provisions of $3.9 billion, and the ratio of provisions to credit risk weighted assets at 1.25 per cent. Collective provisions included a management overlay of almost $800 million and an unchanged economic overlay;
- CET1 (Internationally Comparable basis) was 13.3 per cent. CET 1 (APRA basis) increased 70 basis points (on the prior twelve months) to 9.2 per cent;
The Group remained one of a limited number of global banks in the ‘AA’ ratings category.
Looking at home loans, average balances increased by $24 billion or 6% on the prior comparative period to $404 billion. The growth in home loan balances was largely driven by growth in Retail Banking Services and Bankwest. There was a drop of margin of seven basis points related to home lending, reflecting intense competition and discounting in the market.
In their outlook, they highlight the importance of job creation.
The Australian economy has many of the foundations necessary to make a successful transition from its dependence on resource investment. Population growth, a vibrant construction sector, some signs of increased business investment, greater trade access supported by a lower Australian dollar and a strong banking sector are all contributing to an economy that remains the envy of most developed markets. However, the volatility of the global economy continues to undermine confidence, particularly the impact of lower commodity prices on national revenue. Weak confidence is a significant economic threat. Businesses need the certainty to invest to create jobs, and households need a greater feeling of security. That requires implementation of a coherent long term plan that clearly addresses target government debt levels and timeframes, infrastructure priorities, foreign investment, business competitiveness policies and, above all, job creation.
Overall then, whilst profit was in line with expectations, revenue growth may be slowing, and margins are under some pressure thanks to what the bank called “competitive asset pricing” aka the battle for home loan market share.
