CBA adjusts to cooler climes

Commonwealth Bank’s March quarter update continues the sector’s recent themes of relatively modest volume growth, a continuing fall in impairment charges, good cost control and strengthening capital and liquidity positions.

The bank’s cash earnings of $2.2 billion are consistent with the group’s first half run-rate, just under 16 per cent ahead of the same quarter last year. But within the result are indicators of subtle changes to the context in which the major banks are operating.

As CBA said, system credit growth is modest, with the demand stimulated by the low interest rate environment offset by higher levels of repayments.

In the post-budget environment, it is improbable that there will be a sudden uptick in demand for credit. The opposite would seem more likely.

CBA noted that commercial lending growth remained subdued, as it has been for most of the post-crisis period. The modest post-election pick-up in commercial lending has waned.

While impairment charges continue to decline -- CBA’s impairment expenses were $204 million for the quarter compared with $255m a year ago -- there has been a slight but discernable lift from very low levels in 90 days or more home loan and credit card arrears.

The apparent pre-budget drop in consumer and business confidence, the flattening of growth in retail sales and the impact of the relatively tough budget on households isn’t going to have a positive impact on those trends. However, the continuing low interest rate environment ought to underwrite the maintenance of a relatively benign environment for credit quality.

CBA did report "solid" revenue growth and cost discipline and positive "jaws" (a rate of revenue growth above the rate of growth in costs) for the quarter and maintenance of its first half business momentum.

It noted, however, that there had been an increased focus on managing the trade-off between volume and margin as competitive pressures intensified.

The increase in CBA’s liquidity and capital reflects the system’s continuing shift towards more conservative regulatory settings. It is holding liquid assets of $144bn compared with $137bn at the end of December and its common equity tier one capital ratio has risen from 7.7 per cent in March last year to 8.5 per cent. The sale of its property business contributed 19 basis points to the improvement.

A marginal decrease in its net interest margin was attributed to the higher level of liquidity. With historically high levels of liquidity now a permanent feature of the sector and the banks scrapping for their share of the modest levels of volume growth, the pressure on net interest margins isn’t going to abate.

The third quarter result contained no surprises. CBA continues to produce clean and high-quality numbers within subdued but relatively stable external settings.

With the budget’s forecasts of lower economic growth, slightly higher unemployment and falling business investment (and an inevitable end to the cycle of declining impairment charges), it will be a reasonable achievement if it and its peers can continue to produce more of the same.