Is the Commonwealth Bank becoming less confident about the second half and 2008 full year profit?
Maybe.
The sharemarket didn’t stop to think after yesterday’s trading update from the Bank, sending the CBA shares higher on a day when other bank shares had a bit of a battle.
CBA shares jumped 89c in the wake of the update to a day’s high of $45.87, before they fell back to end at $44.82, down 14 cents.
Perhaps the reason for the late easiness was the fact that more investors had gotten around to reading the update more fully and comparing it with previous statements.
If they haven’t, they should have because there’s clear suggestion that the CBA might not be as confident about the second half and full year profit picture as it was when the interim profit was released in February.
That’s because the bank omitted one of its key phrases, the one where it expresses confidence about future earnings per share growth.
The latest update read:
"Commenting on the March quarter, Commonwealth Bank Chief Executive Officer, Ralph Norris said: “The Group achieved good volume and share gains in its banking businesses and is well positioned to continue to grow in an environment where we are beginning to experience a slowing in underlying credit growth. Our Wealth Management business demonstrated the strength of its brand and its distribution capabilities by again recording positive net inflows.
"However, difficult trading conditions in equity markets will clearly have a negative impact on their second half earnings. We are continuing to invest for medium term growth and productivity, as evidenced by the recent announcement to replace our core banking systems.
“In a challenging funding environment, the Group completed its long term wholesale funding program for the current financial year in April, and we maintain a prudent liquidity buffer as a contingency. Credit quality remains good and despite some signs of an economic slowdown there are no indications of any systemic deterioration at this stage.
“The March quarter has been a challenging one for the global banking industry and despite some recent signs of improvement the outlook remains uncertain. In this environment being well funded with a strong capital base places us in an excellent position to continue to grow our strong franchise.”
No mention about earnings, but more importantly, no use of the phrase "the Group believes that it should continue to deliver EPS growth which meets or exceeds the average of its peers", which has been the standard way the CBA has made forecasts about earnings in its updates and earnings outlooks for a number of years.
It was last used in the outlook issued with the interim result in February:
Then the CBA said: "With a strong capital position, a diversified funding and asset profile, banking and wealth businesses which are generating solid profit growth and an ongoing commitment to reinvest for the future, the Group is well positioned. While it is difficult to forecast peer performance because of market volatility and its varying impacts, the Group believes that it should continue to deliver EPS growth which meets or exceeds the average of its peers."
So are we to assume that the bank now has no confidence that its earnings per share growth will be equal of, or exceed that of "its peers"?
There’s certainly enough evidence in the update that things might be a little rough for the CBA at the moment, especially in the funds management business. That’s going to have a poor second half, from what CEO Norris said in the outlook statement.
But the bank has seen some positives. It said it has experienced above system growth in its home loans and household and business deposits, benefited from the "flight to quality", saw credit quality in its commercial book remaining sound and no evidence of systemic credit issues.
"The group achieved good volume and share gains in its banking businesses and is well positioned to continue to grow in an environment where we are beginning to experience a slowing in underlying credit growth," Commonwealth Bank chief executive Ralph Norris said.
The bank said its retail arm had maintained its solid performance over the quarter, with strong volume growth in key product lines and tight expense management, land lending and deposits were growing, although at a slower rate, in its business services division.
But the bank’s funds management business had been affected by poor investment markets which would constrain fee revenue in the second half.
Funds under administration (FUA) declined 5.4% during the quarter, primarily due to market falls in Australian and global equities.
The bank said it was "currently holding an excess liquidity buffer of $10 billion as a contingency, which will have a slightly negative impact on NIM (net interest margin)." As market conditions improve, it is anticipated this excess will be progressively reduced."
For the full year, the Commonwealth Bank expects its aggregate loan impairment expense as a percentage of gross loans and acceptances to be around 0.23%.
Of course its refusing to rule itself in our out of competing for St George, just as the NAB is doing. It’s early days in this big takeover battle.
