The market ended up not liking the interim result from the Commonwealth Bank of Australia, despite an initial positive response.
In fact you could say that by the close of trading yesterday the CBA result and its 19 per cent rise in underlying cash earnings to $2.271 billion, didn’t convince many investors at all.
Most bank shares were showing red by the close, seemingly a small knock on effect from the CBA’s loss of ground with the ANZ off 11c at $29.60.
CBA shares opened strong with the result released before trading started.
They had closed at $51.60 on Tuesday but the opening quote was a very strong $52.15 and they quickly rose to a day’s high of $52.23.
The bank has enjoyed a stellar run in the past month as the shares galloped past $50 and on to $51 and above.
But then the rot set in and investors sold off the bank as analysts returned from briefings and started crunching the numbers.
The upshot was that the shares closed on the day’s low of $51.35, a sure sign of doubt among investors.
It would seem from early analyst comment they feel there’s a quality problem. The headline rise in cash profit was 10 per cent, to $2.191 billion; while the underlying rise was almost double that.
Not helping is a feeling that the bank’s shares have been ‘over bought”: they’ve risen around 18 per cent in the past year against a 15 per cent or so rise in the overall market.
Market share figures produced at the briefing by the bank showed continuing falls (small but still falls) in CBA market share in home lending, credit cards and retail deposits 9the CBA has more retail deposits than any other bank, but is losing share).
The CBA’s share of personal lending was up while business lending was either lower, according Reserve Bank figures, or up, according to figures from APRA, the main regulator.
The net interest margin contracted and there were some ‘one off items’ in the profit, such as asset sales, which also worried analysts.
CEO Ralph Norris told a briefing yesterday that three interest rate rises last year from the Reserve Bank had failed to weaken its mortgage book.
He said the bank’s position “is still very strong, we don’t see any systemic issues in our mortgage book.
“We have seen a very slight increase in arrears in January but nothing that would give us any cause for concern.”
The CBA’s Colonial First State fund-management unit lifted assets under management by 11 per cent to $168 billion while earnings jumped a very solid 27 per cent to $232 million.
The CBA will pay an interim dividend of $1.07 a share, up from 94 cents a year earlier after revenue rose 13 per cent to $16.3 billion. Cash earnings per share were up 17 per cent to $1.75 a share.
Another worry was that continuing compression of the bank’s key measurement, its net interest margin, which contracted from 2.29 per cent in the first half of 2006, to 2.22 per cent in the latest half (In contrast the much smaller Bank of Bendigo lifted its net margin 13 points in the December half!)
The CBA says it’s on track to match or better the earnings performance of its peers this year.
“The group has maintained good earnings momentum and strong credit quality over the first six months of the 2007 financial year,” CBA said.
“Given the positive outlook for growth and the diversity of the group’s income streams, the group remains on track to deliver cash earnings per share (EPS) growth which meets or exceeds the average of its peers.”
The bank said it generated a significant improvement in its return on equity, up 60 basis points to 22.3 per cent.
“This is another good result and I am pleased that our disciplined approach to targeting profitable growth has again delivered double digit earnings growth and a record interim dividend,” chief executive Ralph Norris said.
“We have achieved this in a competitive environment, without relaxing our high credit standards.”
The banking business performed well with underlying net profit of $1.867 billion, up 17 per cent and “Credit quality across the banking business remains strong,” CBA said.
“In a competitive environment, the Australian retail banking business delivered strong volume growth in home loans and domestic deposits but lost share in credit cards where it elected not to compete for short term unprofitable business.”
