Commonwealth Bank

Commonwealth Bank has announced an update for the third quarter ending 31 March (the bank has a 30 June year end). Unaudited cash earnings have increased slightly from $1.70bn in the same period last year, to $1.75bn. While we’re unable to quantify the various components, it’s a respectable achievement given the current pressure on profit margins due to higher funding costs and anaemic lending growth.

While chief executive Ian Narev is watering down expectations, 2012 may yet produce another year of record profits and higher dividends. That these results are occurring in such a weak lending environment shows Australia’s big four banks still have some monopolistic pricing power, which is one reason we prefer the four major banks to the statistically cheaper regional banks.

We recommend keeping banks to 10% of a well-diversified portfolio, which includes income securities issued by the banks. Commonwealth Bank’s share price has barely budged since Comm Bank: Boom ends quietly, for now from 17 Feb 12 (Hold – $50.21), and we’re sticking with HOLD.