CBA First-Quarter Profit Rises 14% on Lower Bad Debt Charges

Commonwealth Bank of Australia, the nation’s largest lender by market value, reported first-quarter cash profit climbed 14 percent on lower bad debt charges.

Unaudited cash profit, which excludes one-time items, was A$2.1 billion ($2.0 billion) in the three months to Sept. 30, the Sydney-based lender said in a statement today. That compared with A$1.85 billion reported in the year earlier quarter. Unaudited net income was also A$2.1 billion compared with A$1.8 billion a year earlier.

Chief Executive Officer Ian Narev is ratcheting up CBA’s focus on gaining market share after stabilizing its net interest margins. The bank, which issues one in every four mortgages in the country, expanded home lending by 5.2 percent in the year through August, according to the Australian Prudential Regulation Authority. It also increased its business lending share to 17.9 percent as at June 30 from 17.7 percent a year earlier, CBA filings show.

“The results put CBA on course to meet full-year earnings expectations,” David Ellis, Sydney-based analyst at Morningstar Inc. said by phone. “CBA, like its competitors, is gaining from falling bad debts and by capping cost growth. Its capital is not as strong as its peers though.”

CBA set aside A$228 million for bad debts in the quarter, the lender said in the statement. That compared with A$291 million reported a year earlier.

Interest Margin

Net interest margin, a measure of lending profitability, was “marginally lower” in the quarter compared with the prior half year, the lender said, reflecting deposit margin compression in a lower interest-rate environment. A fall in margins has marred the record-profit run for the so-called four pillar Australian banks, named after a law that prevents merger with each other.

Growth in mortgages, which is CBA’s biggest segment, remained modest in the quarter with the bank’s lending growing slightly faster than the industry average, it said.

Australian mortgages expanded 4.8 percent in the year to September to the highest level since August 2012, while business credit grew 1.1 percent, central bank data show.

Demand for mortgages is increasing after the central bank dropped rates by 225 basis points since late 2011 to a record 2.5 percent and banks cut mortgage rates to a four-year low. House prices in the eight capital cities climbed an average 7.6 percent in the September quarter from a year earlier, government data showed Nov. 4.

Customer Deposits

Customer deposits made up 64 percent of CBA’s total funding in its first quarter, up from 63 percent as at June 30, the lender said. Common equity tier 1 capital, a measure of a bank’s ability to absorb losses, was 7.8 percent as of Sept. 30., down from 8.2 percent three months earlier, the lender said.

Trading income remained at “relatively strong levels” and revenue grew faster than costs in the quarter, it said.

CBA results follow record full-year earnings for its main competitors. CBA’s fiscal year ends in June compared with Sept. 30 for the others. Australia & New Zealand Banking Group Ltd. (ANZ) posted Oct. 29 a 13 percent increase in second-half profit. National Australia Bank Ltd. (NAB) reported a 16 percent gain Nov. 1 and Westpac Banking Corp. (WBC) posted a 5 percent increase Nov. 4.

“The four banks are focusing on business simplification and improving their cost-to-income ratio,” Morningstar’s Ellis said. “Going forward, for a modest growth in revenue, the banks will get disproportionate earnings leverage.”

To contact the reporter on this story: Narayanan Somasundaram in Sydney at nsomasundara@bloomberg.net

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

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