Commonwealth Bank’s First-Half Profit Exceeds Estimates on Fewer Bad Loans

Commonwealth Bank of Australia, the nation’s biggest bank by market value, said first-half profit rose 19 percent as fewer loans soured.

Net income in the six months ended Dec. 31 climbed to A$3.62 billion ($3.87 billion) from A$3.05 billion a year earlier, the Sydney-based bank said in an e-mailed statement today. That beat the median estimate of seven analysts surveyed by Bloomberg News for profit of A$3.51 billion.

Chief Executive Officer Ian Narev, who took over from Ralph Norris in December, is among Australian bank chiefs battling the weakest demand for home loans since 1977. Rising wholesale funding costs, fueled by Europe’s debt woes, led Commonwealth Bank to boost its mortgage lending rate by 10 basis points this week, a move independent of the central bank, which kept borrowing costs unchanged last week.

“They’re not doing much wrong,” said Mark Nathan, who helps manage about A$3 billion of assets at Arnhem Investment Management in Sydney. They had a “solid impairment performance, modest growth, but not out of line with what can be expected in the current credit environment.”

Shares (CBA) of Commonwealth Bank rose 0.5 percent to A$50.23 in Sydney, taking this year’s gain to 2.1 percent. The benchmark S&P/ASX 200 index gained 0.3 percent today.

Commonwealth Bank’s business and private banking profit rose 10 percent to A$551 million, while retail banking earnings increased 3 percent to A$1.44 billion, the lender said in today’s statement.

Fundamentals Strong

“The current trend of weak credit growth, asset allocation towards cash and volatile markets will continue in Australia,” Narev said in today’s statement. Still, “the fundamentals of the Australian economy remain strong,” he said.

Commonwealth Bank’s so-called cash profit, which excludes accounting gains including from hedging, rose 7 percent to A$3.58 billion. The median estimate of six surveyed analysts was for cash earnings of A$3.52 billion

The lender will pay a dividend for the half of A$1.37 a share, 4 percent more than a year earlier.

Melbourne-based National Australia (NAB) said last week that cash profit climbed 7.7 percent in the three months ended Dec. 31 to A$1.4 billion. Westpac (WBC) is due to publish fiscal first-quarter earnings tomorrow, followed one day later by Australia & New Zealand Banking Group Ltd.

Increased Deposits

While Australia’s biggest banks have cut their reliance on credit markets as local households save at close to the highest rate in a quarter century, debt markets still furnish about 40 percent of the funds they use for lending.

Customer deposits made up 62 percent of Commonwealth Bank’s total funding as of Dec. 31, up from 60 percent a year earlier, the lender said today. Customer deposits jumped $35 billion to A$370 billion.

The four largest lenders boosted their interest rates independent of the central bank since Feb. 10, actions condemned by lawmakers including Treasurer Wayne Swan, who urged customers to switch lenders.

Commonwealth Bank of Australia increased the interest on a variable rate home loan by 10 basis points to 7.41 percent on Feb. 13, followed by National Australia, which added 9 basis points to 7.31 percent. Westpac boosted the cost by 10 basis points to 7.46 percent on Feb. 10, after ANZ Bank added 6 basis points to 7.36 percent.

Commonwealth Bank’s net interest margin, a measure of the profitability of the bank’s lending business, narrowed 10 basis points to 2.15 percent in the half year from 2.25 percent in the six months through June 30, the bank said today.

Narev said until there are clear signs of a sustained recovery, particularly in Europe, “average funding costs will continue to rise.”

Impairment charges for soured loans fell 25 percent to A$545 million, the bank said.

To contact the reporter on this story: Jacob Greber in Sydney at jgreber@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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