THE DISTILLERY: A wee CBA oversight

Our pack fell upon yesterday's Commonwealth's interim result and they gushed, spluttered and sniped at the figures. But dig into the result and you discover that the reason cash earnings rose was due to a 48 per cent drop in bad debts, which was the big influence for third half-year in a row. Not answered though is where the growth in earnings is going to come from once bad debts are restored to normal levels, as they now seem to be approaching. Today there's Telstra's interim to be gored, and the Rio Tinto final to go 'ooh, ahhh' over.
 
Ian Verrender wrote in the Fairfax broadsheets this morning: "Sir Ralph Norris, knight of the realm and lord of all things banking in the Antipodes, cut an imposing figure yesterday, once again stamping his authority over the world of high finance. Urbane and ebullient as ever, he showed little outward evidence of the welts meted out by the rabble of borrowers baying for blood and hurling insults after last November's super-sized interest rate rise. Rather, Sir Ralph again appears to have cast a spell over his subjects. Most nodded sagely in agreement at his pronouncement that the massive rate rise on Melbourne Cup day was the best thing that ever could have happened."
 
The Australian Financial Review's Chanticleer said: "There are faults in the Commonwealth Bank of Australia's better than expected $3.3 billion half-year profit but there is nothing to damage the bank's premium stockmarket rating. But the biggest risk to the bank's future profitability, apart from the threat of government intervention to rein in bank profits, is the succession planning for chief executive Ralph Norris."
 
Fellow Fairfaxian Malcolm Maiden was rather blase about the CBA result: "This week's Australian Competition and Consumer Commission finding that Sydney and Melbourne airports might be extracting monopoly rents in car parks and other areas and the criticism Commonwealth Bank will cop once again for demonstrating that it is a solidly profitable business come down to the same thing: you get what you pay for. As CBA's chief executive, Ralph Norris, tried to say again yesterday, the bank does not post massive profits, pound for pound. It's just that it's a massive enterprise. It makes a bare 1 cent in the dollar of assets and has been doing so for years, and its 19.2 per cent return on shareholders' funds is good, but not gobsmacking – up from 15.8 per cent in 2009 when debt defaults were peaking, but down from 21 per cent-plus in 2006 and '07." A 19.2 per cent return on shareholders funds is "gobsmacking" and due to the impact of leverage.
 
Michael Pascoe pointed out on smh.com.au yesterday: "February four years ago, Ralph Norris announced a first-half profit of $2.2 billion and the share price was $51. Today's interim is 50 per cent higher while the share price is only up about 8 per cent. That's ignoring the extra shares that have been issued, which is naughty, but you get the gist. For all the criticisms, for all the doubts, for all the effort analysts put into finding something to write about, Australia's flagship retail bank is a very solid and profitable institution that just keeps making money. It's paid off for those who have conservatively banked on the bank in the economic recovery and there's nothing in today's numbers to indicate an immediate threat to a dividend stream that remains better than anything you can get for a term deposit."
 
And Tim Boreham wrote on The Australian's website yesterday: "Just in case Julia Gillard and Wayne Swan had tuned into this morning's profit briefing, CBA chief Ralph Norris added a bit of context to the bank's $3.335 billion of interim cash earnings, 13 per cent higher and exceeding most analysts' expectations. According to Norris, this surplus was generated from a company with $650 billion of assets, which makes for a humble annual return on assets of 1 per cent. "This level compares with 7 per cent for the 20 largest companies ex banking,'' Norris says. "Yes, we are a profitable organisation, but not excessively so." No, 1 per cent is the yardstick in banking and the CBA is doing very nicely, thank you Sir Ralph.
 
And the AFR reported that at another bank, UBS, the local chaps are revolting: "Local management at the Swiss bank are not taking the announcement of a 10 per cent drop in the global bonus pool lying down." Poor dears. Someone should tell them that's the rules of the game, things can fall as well as rise.
 
Elsewhere, Bryan Frith in The Australian makes a very pertinent point about the performance of OZ Minerals last year and its spectacular annual result yesterday: "OZ Minerals' stunning 2010 performance vindicates the board and its advisers who stuck with the controversial proposal to sell all of the company's assets other than Prominent Hill to China Metallurgical rather than opt for either of two eleventh-hour recapitalisation proposals purporting to offer greater value. The OZ shareholders are now reaping the benefits. The company yesterday reported an underlying profit of $398 million, which swelled to $587 million after taking into account reversal of impairment provisions made in the previous year." And shareholders stand to receive more than $900 million in dividends (one already paid, another coming, a capital return, share consolidation and then a share buyback). And most of this value would have cascaded to the proponents of two last minute recapitalisation plans that some in the market claimed should have been accepted. Where are the critics now?
 
Terry MCCrann says: "Treasurer Wayne Swan holds Australia's entire financial future in Asia in his hands. Will he literally sign it away with the stroke of his pen? Swan faces the single most important takeover decision of an Australian financial institution since Paul Keating refused to allow the ANZ Bank to buy the old National Mutual Life office in the early 1990s. In an even more critical move, AXA agreed to build its Asian business through the Australian company. That has now grown into by far our biggest and most important financial activity in Asia. And most critically of all, it is on the threshold of extraordinary new growth in China. All run out of headquarters in Melbourne. Yet if Swan waves through the joint AMP-AXA takeover of AXA-AP, all that Asian present and even more that Asian growth future will be lost to Paris. We will never be able to rebuild it. We will be largely cut out of China's financial future. " And Business Spectator's Robert Gottliebsen completed a three part look at the deal with this conclusion: "My guess is that Axa shareholders will follow in the footsteps of Western Mining and roll over without ever knowing what they are giving up. ANZ is struggling in Asia, so if Canberra allows the deal to go through we are locking ourselves even more into minerals. But who in Canberra cares about the longer term when there are flood levies to debate? "
 
The Woolies succession story won't die, thanks to Woolies chairman James Strong somehow managing to keep it alive. John Durie wrote on The Australian's website yesterday: "Woolworths has hired recruitment firm Egon Zehnder to search for new board positions amid continuing speculation about the future of chief executive Michael Luscombe. A spokesman denied the headhunting firm was hired to search for a replacement for Mr Luscombe, who is the subject of growing speculation that he would step down shortly. The spokesman declined to comment on Mr Luscombe's speculated departure date. Woolies chair James Strong has used his words carefully in commenting on the move, telling The Australian: "Our succession plans are well established" and "Michael has the board's full support for as long as he is in the job."

And this morning, Durie had Luscombe going: "The plan, it seems, was always for Michael Luscombe to stand down as Woolies boss at the end of this year, fresh from the successful launch of the home improvement franchise and five great years running the company. No one inside the company will confirm the timing but the resurgent Coles has put a slight dent in what was to be a victorious handover to supermarket boss Greg Foran. Just how big a dent will in part depend on how Woolies chair James Strong handles the speculation of Luscombe's imminent departure because the longer it goes unanswered the more it will be misconstrued as a forced departure." This story is starting to look like an example of incompetence. A few comments from the CEO in an interview in the AFR last weekend, a jotter on the SMH then says they suggest an imminent departure, a rival jotter says rubbish, then hang on, then yes, there's a plan. All mysterious and the disclosure completely inadequate.