CBA Rises to Record as Quarterly Profit Climbs 14%

Commonwealth Bank of Australia, the nation’s largest lender by market value, rose to a record in Sydney trading after posting a 14 percent increase in first-quarter cash profit on lower bad debt charges.

CBA climbed 1.3 percent to close at A$77.96 after touching an intraday high of A$78.40, taking gains for the year to 25 percent. The benchmark S&P/ASX 200 index rose less than 0.1 percent. The bank’s unaudited cash profit, which excludes one-time items, was A$2.1 billion ($2 billion) in the three months to Sept. 30, the Sydney-based lender said in a statement today, from A$1.85 billion reported a year earlier.

Chief Executive Officer Ian Narev is ratcheting up CBA’s focus on gaining market share after stabilizing 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 of 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. “Dividends look sustainable based on expected earnings-per-share growth. Despite slightly lower margins we consider the major banks’ ability to reprice loans remains intact, underpinning their competitive strengths”

He expects CBA’s cash profit to rise to A$8.25 billion in the year ending June 30 from A$7.82 billion. Unaudited net income in the first quarter was A$2.1 billion compared with A$1.8 billion a year earlier.

Margin Squeeze

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.

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

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

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

Mortgage Growth

Demand for mortgages is increasing after the central bank cut rates by 225 basis points since late 2011 to a record 2.5 percent and banks trimmed 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 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, it 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 reported since last week. CBA’s fiscal year ends in June compared with Sept. 30 for the others. Australia & New Zealand Banking Group Ltd. posted a 13 percent increase in second-half profit. National Australia Bank Ltd. reported a 16 percent gain in the six months and Westpac Banking Corp. posted a 5 percent increase.

“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.”

Before it's here, it's on the Bloomberg Terminal.