Commonwealth Bank Warns of Turbulence as Profit Growth Slows

  • CBA first of biggest Aussie lenders to report recent earnings
  • CEO Narev says investors have overreacted to market risks

Commonwealth Bank of Australia warned of the risks posed by global economic turbulence as the lender posted its slowest first-half profit growth since the financial crisis.

The more prolonged the market volatility, the greater the potential threat to confidence and Australia’s economy, Chief Executive Officer Ian Narev said on a webcast Wednesday. The bank, Australia’s biggest mortgage lender, earlier reported a 3.9 percent increase in cash profit in the six months ended Dec. 31. That’s the smallest gain for the same period since 2008.

“We must be aware of those risks, but overreaction is also a risk,” Narev said on the call. Investors’ response so far has been “out of proportion,” he said.

Banking stocks including Commonwealth Bank have been beaten down in this year’s global equity rout, driven by concern about the Chinese economy, lower commodity prices and access to funding. Commonwealth Bank is the first of Australia’s big four banks to report its most recent earnings, helping investors judge their ability to withstand global forces. 

“The overriding feeling is global banks are in a tough spot and the Australian banks have no doubt got caught up in the overall malaise,” Chris Weston, chief markets strategist in Melbourne at IG Ltd., said by phone. Commonwealth Bank’s “numbers are good but they’re not going to shoot the lights out.”

Commonwealth Bank shares advanced 1.8 percent to A$74.20 at the close in Sydney, trimming this year’s loss to 13 percent. Australia’s benchmark S&P/ASX 200 Index fell 1.2 percent Wednesday.

“Two weeks of turbulence doesn’t necessarily mean the world has come to an end,” David Craig, chief financial officer of Commonwealth Bank, said in an interview. “We think it’s been overplayed.”

Funding Costs

The availability of funding for the bank was “high,” Narev said, taking questions from analysts. “We’re seeing nothing in the external markets that would cause us to change any aspect of our strategy.”

Reduced risk appetite is affecting banks’ funding costs and Commonwealth Bank last month priced 5-year Australian dollar bonds at a 115 basis-point spread over the swap rate. That was 35 basis points wider than its peers achieved last May.

Short-Term Funding

Short-term funding hurdles aren’t a problem, said David Ellis, an analyst at Morningstar Inc. in Sydney. Higher costs take years to soak through a bank’s loan book, Ellis said. 

There’s also little sign that defaulting borrowers are worrying Commonwealth Bank, Ellis said. Total provisions for loan impairment swelled 1 percent to A$3.66 billion from the previous six months.

“If the bank thought that was a major problem in the future they would have, or should have, increased the loan provisions to compensate,” Ellis said. “They didn’t.”

While there’s a need to monitor commodity-related creditors, there are “no material signs” that they’re finding it harder to repay loans, Narev said. Australia’s economy continues to make a transition from resources to a broader range of industries, he said.

The lender’s common equity Tier 1 capital ratio, a gauge of its ability to absorb losses, increased to 10.2 percent at the end of December from 9.2 percent a year earlier.

Commonwealth Bank raised A$5.1 billion ($3.6 billion) through a rights offering last year to meet new capital rules as part of a record A$20 billion capital raising by Australia’s largest lenders.

Cash Profit

Cash profit, which excludes one-time items, climbed to A$4.80 billion from A$4.62 billion a year earlier, swelled by rising income from mortgages and business lending. That beat the A$4.74 billion median estimate among analysts.

The bank’s net interest margin, a key measure of lending profitability, was 2.06 percent, unchanged from the previous six months and down 5 basis points from the year-ago period. The bank kept its interim dividend unchanged at A$1.98 per share.

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