CBA salutes via a suite of tweaks

Cost control and improved loan quality has allowed Commonwealth Bank to more than offset yet-to-peak funding costs, marking a fourth and final bank sector salute.

Commonwealth Bank’s strong March quarter performance rounds out a very solid round of bank results in recent weeks.

In an environment of very subdued demand for credit from households and businesses, the third-quarter increase of almost 9 per cent in cash earnings, to $1.9 billion, is a more-than-respectable achievement, albeit a result in line with the earnings run rate established in the first half of the year.

It would appear from the commentary with the result that, as was the case with its peers when they reported their first half results over the past few weeks, CBA didn’t experience much top line growth.

It did continue to benefit from last year’s decision to hold back some of the Reserve Bank’s cuts to official interest rates, with the bank saying its net interest margin was higher in the quarter due to ‘’asset re-pricing’’ that was partly offset by higher funding costs.

The bank said last year that while its wholesale funding costs were falling, the increased cost of deposit funding meant that average funding costs would continue to rise before peaking around December this year. The group lifted the share of deposits within its overall funding from 63 per cent at December to 65 per cent in March and matched its asset growth to the growth in deposits.

The main drivers of its major bank rivals’ interim results were costs and credit quality.

CBA didn’t provide any detail on its costs other than to say they had been ‘’well managed’’. In the December half CBA experienced a 3 per cent increase in costs but improved its cost-to-income ratio by holding the increase below the 5 per cent increase in income.

It did say, however, that total impairment charges were $255 million for the quarter, or 19 basis points of total average loans. In the December half impairment represented 22 basis points of total average loans. In dollar terms, after peaking at $9.1 billion CBA’s portfolio of impaired and past due loans have been reduced to $7 billion, a marginal improvement on the position at December.

There has been some concern among analysts that impairments are reaching a cyclical low, with the economy softening and some level of distress emerging in the non-resource sectors. That’s not borne out by CBA’s experience, although the trend of reducing impairments over the past two years does appear to have flattened out.

As with all the majors, CBA is very liquid – it is holding $130 billion of liquid assets – and strongly capitalised, with a common equity tier one ratio of 10.3 per cent on an internationally harmonised basis.

All the banks have reduced their reliance on wholesale funding and extended the average term of the funding they have raised to reduce their exposure to short term volatility. In CBA’s case the average tenor of its wholesale funding is 3.8 years.

One of the interesting aspects of the lack of system growth, combined with the major banks’ focus on costs and the improvement in credit quality, is that in the near term it should boost their profitability and capital generation. Growth comes with an upfront cost so its absence should swell near term profits, albeit at a cost to the longer term.

That, and the conservative balance sheet settings the banks now have, helps explain why the market is now starting to talk about capital management and perhaps more of the special dividends that Westpac surprised the market with earlier this month.

If they are generating more capital than they can deploy in a low-growth environment, giving it back to shareholders is a way of both satisfying shareholder demands for return and improving their performance metrics in the process.

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