CBA Posts Record Profit on Wealth Unit, Bad Debt Charge Fall

Commonwealth Bank of Australia, the nation’s biggest lender, posted record second-half profit as earnings from wealth management rose and bad-debt costs shrank.

Cash profit, which excludes one-time items, climbed to A$4.04 billion ($3.68 billion) in the six months ended June 30 from A$3.54 billion a year earlier, the Sydney-based lender said today. That beat the A$3.85 billion median estimate of seven analysts Bloomberg News surveyed by telephone and e-mail.

The shares fell as the bank refrained from paying a special dividend to maintain a capital level that Chief Executive Officer Ian Narev described as “about right.” Narev has been withholding part of the central bank’s interest-rate cuts and trimming costs to bolster profit as loan growth cools amid a slowing economy.

“It is a high-quality result filled with positives such as revenue growth and higher trading income,” said Chris Weston, chief market strategist at IG Markets Ltd. in Melbourne. “The one disappointment today was the dividend,” he said, adding that an annual payout ratio at 75.5 percent was below expectations.

CBA fell 1 percent to A$73.79 as of 1:59 p.m. in Sydney, trimming gains this year to 19 percent compared with an 11 percent increase for the benchmark S&P/ASX 200 index, which was little changed today.

Final Dividend

The bank said it would pay a final dividend of A$2 a share, taking the annual total to A$3.64, a 9 percent increase on the previous year. Full-year cash profit climbed 10 percent to a record A$7.82 billion, the lender said in a statement.

A higher payout or a special dividend “wasn’t right at the moment. We have a capital level that is about right,” Narev said in conference call with analysts. “We have to manage dividend policy for the long term.”

Core Tier 1 capital, a measure of the bank’s ability to absorb losses, increased to 11 percent at the end of June from 10.3 percent in March. Statutory net profit for the second half climbed 16 percent to A$4.02 billion, the bank said.

“It is good times for CBA,” Brett Le Mesurier, a Sydney-based analyst at BBY Ltd., said by telephone. “The results show improving asset quality for now, which is a positive for the sector, though we are expecting bad debt charges to rise with the weaker economy.”

Growth Downgrade

The central bank cut its growth outlook last week as Australia transitions from mining investment toward domestic demand amid a peaking resources boom. It expects gross domestic product will rise 2.25 percent in the year ending December, slower than the 2.5 percent forecast three months earlier.

Australian employers unexpectedly cut payrolls by 10,200 in July and unemployment held at an almost four-year high of 5.7 percent as fewer people sought work. The government on Aug. 2 predicted the jobless rate would rise to an 11-year high of 6.25 percent by July.

Retail banking profit grew 3.5 percent to A$1.55 billion with mortgages expanding 5 percent, CBA said. Institutional banking and markets profit climbed 18 percent. Wealth management profit advanced 19 percent.

The country’s largest banks lowered their benchmark mortgage rates to the lowest since 2009 after the Reserve Bank of Australia cut its key rate to a record 2.5 percent on Aug. 6. The central bank has lowered the rate by 2.25 percentage points since November 2011.

Mortgage Demand

Cheaper borrowing costs are beginning to stimulate mortgage demand. Outstanding home loans in the country grew 4.6 percent in the year ended June from a record low of 4.4 percent three months earlier, central bank figures show. Home prices across the nation’s eight biggest cities rose 2.4 percent in the three months ended June 30, the most in more than three years, the statistics bureau said on Aug. 6.

While units such as retail and wealth management gained momentum, the year ending June 2014 is expected to be similar to the previous year, Narev said. The bank expects mortgage growth of 4 percent to 6 percent in 2014, Matt Comyn, head of the retail bank, said in the call with analysts. It reported a 6 percent increase in outstanding home loans for the year.

Net interest margin, a measure of lending profitability, expanded 7 basis points from the previous half to 2.17 percent after the bank held on to part of the central bank rate cuts, today’s report showed. It set aside A$466 million for bad debts, 14 percent less than a year earlier, the lender said.

Deposits grew A$26 billion and made up 63 percent of CBA’s total funding as of June 30, the bank said. Australian lenders are increasing deposits to ensure compliance with global liquidity rules that begin in 2015.

Australia & New Zealand Banking Group Ltd. is scheduled to report third-quarter earnings on Aug. 16 and National Australia Bank Ltd. announces its quarterly results on Aug. 20. Westpac Banking Corp. doesn’t update investors on its quarterly performance. At CBA, the fiscal year ends in June, compared with September for its main competitors.

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