COMMONWEALTH BANK is on track to deliver a record profit of more than $7 billion this year, after its flagship retail banking arm overcame sluggish credit growth to help drive a 6 per cent jump in half-year earnings across the group.
As lower interest rates start to stimulate the economy, the nation's biggest bank said it expected to post further solid profit growth on the back of improving confidence among households and business.
But despite wholesale funding costs falling sharply in recent months, chief executive Ian Narev played down the chances of banks cutting mortgage rates independently of the Reserve Bank, saying overall borrowing costs remained under pressure.
CBA shares rose sharply to $67.11 on Wednesday, propelling its market value to $108 billion, after it posted better-than-expected cash earnings of $3.78 billion in the six months to December.
The bank's huge retail business, which provides one in every four home loans in Australia, helped drive the growth by posting a 13 per cent jump in profits to $1.5 billion.
With higher confidence sparking a lift in financial markets and the housing market in recent months, Mr Narev said cuts in interest rates were starting to stimulate the economy.
He expected the recovery to continue gradually throughout the coming year, though he remained cautious about risks from overseas.
"The first six months are a sign that if volatility is down and you start seeing a bit of a rebound in confidence, that's good overall for the performance of the group," Mr Narev said. "If you believe those things will continue to happen, we should be on a good positive growth trajectory.
"We feel good about the momentum of the business, but we've learnt over the last few years that that can change pretty quickly."
The result beat brokers' expectations by 2.5 per cent and triggered a bounce in the share prices of Westpac, ANZ and NAB.
A Deutsche Bank analyst, James Freeman, said earnings estimates across the banking sector were likely to be upgraded after the earnings result, which he described as "strong".
"While consensus upgrades are likely for CBA, the result shows strong underlying trends which should be reflected in other banks' results," Mr Freeman said.
The jump in earnings comes as annual growth in home loans remains sluggish, with most customers responding to lower borrowing costs by paying down debt faster.
CBA has also lost a small amount of market share in home lending and deposits, though it remains the dominant force.
Despite these challenges, however, the bank benefited from its decision not to pass on the full value of official interest rate cuts to its customers.
Its net interest margin widened slightly over the six months but fell in annual terms, while return on equity remained unchanged at 18 per cent.
Mr Narev conceded that some people would see the bank's latest profit result as excessive, after lenders' refusal to pass on recent cuts to the cash rate in full to borrowers.
However, he said that funding costs caused by fierce competition for deposits remained a pressure for the bank, and it would continue to weigh up the interests of borrowers, investors and savers.
"Our job, unfortunately, is we've just got to keep focused on the right balance between their needs, deposit-holders' needs, and the needs of 800,000 Australians who own the shares directly and millions more through funds," Mr Narev said.
As part of a plan to pay out a higher share of profits in the December half, the bank will raise its interim dividend by 20 per cent to $1.64.
Consequently, the final dividend paid later this year will be slightly lower than the 2012 payment.