Captain Narev keeps CBA on an even keel

Given the solid nature of the results from its peers in the past few weeks it isn't at all surprising that Commonwealth Bank's first-quarter update shows that it, too, is sailing along nicely.

For the three months to end-September the group boosted cash earnings about 9.5 per cent, to $2.3 billion, or about $200 million more than it generated in the same quarter of last year. It would appear that the reputational issues emanating from its financial planning business aren't impacting the wider group.

Ian Narev would be pleased that the group appears to have regained some momentum after a rather subdued second half in its last financial year, when its top-line growth appeared to stall. Today's update noted that revenue growth, and cost discipline, resulted in positive “jaws” (the difference in the growth rates of costs and income) being maintained.

As with all the major bank results in recent years CBA's performance continues to be boosted by declining charges for bad and doubtful debts. A year ago the charge for impairments was $228 million; in the first quarter of this year it was $198 million.

Since peaking at 73 basis points in 2009, the rate of loan impairment expenses to gross loans has fallen steadily and substantially, to only 13 basis points in the latest quarter.

It is, of course, impossible for those charges to keep falling indefinitely, which will cause the banks to place even more emphasis on cost-cutting (which has been a significant feature of recent bank results) and top-line growth.

The relatively weak level of demand for credit, particularly from businesses, has led to quite intense competition for the available business.

It was notable in the results of its peers, and in CBA's update, that net interest margins continue to be under pressure, although CBA described the reduction in its margin as only “marginally lower”, with improved wholesale funding costs offset by the impact of competition on pricing.

With the final report of the Murray inquiry into the financial system looming, there has been a lot of focus on bank capital adequacy ratios.

CBA's common equity, tier one ratio, actually fell from a very conservative 9.3 per cent at June 30 to 8.6 per cent at September 30, with the capital generated through profits offset by the payment of its final dividend for last financial year and by growth in its asset base.

While there is some dispute about the way the Australian majors calculate their ratios on an internationally harmonised basis (CBA calculated its internationally harmonised ratio as 12.9 per cent) there is no doubt that, even before the Murray inquiry adds to the capital surcharges the major banks face, the big banks are relatively conservatively capitalised.

The funding issue highlighted during the financial crisis, when offshore wholesale debt markets froze, is more an issue of liquidity than capital. CBA is holding $145 billion of liquid assets and is funded 63 per cent by customer deposits.