Commonwealth Bank’s Mortage Lending Boosts Profit 10% to Record

Commonwealth Bank of Australia, the nation’s biggest mortgage lender, posted a 10 percent increase in second-half profit to a record as earnings from retail banking climbed.

Cash profit, which excludes one-time items, for the six months ended June 30 climbed to A$4.41 billion ($4.09 billion) from A$4.01 billion a year earlier, the Sydney-based lender said in a statement. That compared with the A$4.38 billion mean estimate of six analysts surveyed by Bloomberg.

While CBA is benefiting from higher mortgage demand in Australia, a lower tax rate boosted the result, which also revealed the first increase in charges for sour loans since 2012. The bank’s Chief Executive Officer Ian Narev foreshadowed a gradual increase in consumer spending and in business credit in the year to June 2015.

“It is a slightly lower-quality result compared to earlier periods, given the assistance from a lower tax rate,” Omkar Joshi, who helps oversee about A$1 billion as an investment analyst at Watermark Funds Management Pty in Sydney, said by phone. “It’s likely that we have passed the sweet spot in the asset-quality cycle and that bad-debt charges start to tick higher from here.”

Shares of CBA dropped 1 percent to A$80.90 as of 3:23 p.m. Sydney time, the first decline in three days. The benchmark S&P/ASX 200 index lost 0.4 percent.

Lower Taxes

CBA’s effective tax rate was 26.4 percent in the second half from 27.2 percent a year earlier. Funds set aside to cover nonperforming loans rose 6.4 percent to A$496 million, the first since the six months to December 2012, filings show.

On a conference call with analysts, Narev attributed the increase in bad-debt charges to “four relatively bigger accounts weakening in business and private banking.” The accounts, which weren’t identified, were long-standing credits that weren’t correlated, and CBA didn’t regard them as a sign of “systemic weakness,” Narev said.

The company’s net income for the second half climbed 11 percent from a year earlier to A$4.42 billion. Full-year cash profit climbed to a fifth consecutive record of A$8.68 billion from A$7.76 billion a year earlier.

The bank will pay a final dividend of A$2.18, up from A$2.00 a year earlier and matching the mean estimate of five analysts.

Retail-banking profit grew 15 percent in the second half from a year earlier to A$1.8 billion, while earnings from its institutional banking and markets businesses fell 2.5 percent, the bank said. Wealth-management profit rose 14 percent.

The bank’s home lending grew 7.6 percent while its mortgage market share was steady at 25.3 percent. Loans to businesses rose 7.5 percent from a year earlier, CBA said.

Home Lending

The Reserve Bank of Australia’s record-low interest rates have given lenders scope to cut borrowing costs, spurring demand for home loans. CBA lowered its five-year fixed-mortgage rate to a record low of 4.99 percent, it said in a July 23 statement.

Outstanding mortgages in Australia climbed 6.4 percent in June from a year earlier, the fastest pace since March 2011, RBA data show. The central bank left on Aug. 5 its key interest rate at a record low of 2.5 percent for the 12th month and reiterated it expects a period of steady borrowing costs amid below-trend growth.

“Lower interest rates have been positive for the housing and construction sectors,” CBA CEO Narev said in today’s statement. “If the stability in global markets continues, gradual increases in consumer spending and demand for credit from businesses over the next year are likely.”

Capital Ratio

CBA’s net interest margin, a measure of lending profitability, rose 1 basis point, or 0.01 percentage point, to 2.14 percent from a year earlier as lower funding costs offset lending competition. Net interest income, the difference between what it collects from lending and pays on deposits, rose 8 percent to A$7.65 billion, today’s report showed.

CBA’s common equity Tier 1 capital ratio, a gauge of the bank’s ability to absorb losses, increased to 9.3 percent at the end of June from 8.5 percent on March 31, under Australian Prudential Regulation Authority criteria. The measure, which was boosted by the sale of property, already exceeds the 8 percent level the nation’s four largest lenders will be required to hold by January 2016.

Deposits increased to A$439 billion and made up 64 percent of CBA’s total funding as of June 30, the bank said. The bank raised A$38 billion through bonds, it said.

Bank borrowing costs in Australia are near the lowest level in more than six years, according to Bank of America Merrill Lynch indexes. The average yield premium over the swap rate for bank bonds in Australia touched 90 basis points last month, the least since February 2008, the indexes show.

Australia & New Zealand Banking Group Ltd. reports its quarterly update Aug. 15, followed by National Australia Bank Ltd. on Aug. 18. Westpac Banking Corp. doesn’t provide a quarterly update. CBA’s fiscal year ends in June, compared with September for its main competitors.

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