Commonwealth Bank shares led the markets and the banks lower yesterday after more gloomy comments from CEO Ralph Norris and chairman David Turner at the AGM.
The falls were all small, except for the 77c, or 1.5% drop in the CBA’s share price to closing $50.18 yesterday, the lowest since mid-September when the shares hit $53.80.
The comments from Mr Norris about higher costs and a "challenging" outlook came on the eve of the NAB revealing its 2010 full year profit later today and the ANZ tomorrow.
Mr Turner delivered a big hint that the CBA is facing a tough year and might not match the 2010 record profit of $6.1 billion.
And from the comments, there’s a chance the CBA’s interim profit might struggle to match that of 2010.
But offsetting that, the improvement in credit conditions (meaning bad debts and provisions) is continuing into the 2011 financial year, according to comments to the AGM.
That was the single biggest reason why the bank earned a record $6.1 billion in 2010.
The CBA duo again warned that higher funding costs were likely to remain an issue for all banks over the short to medium term, possibly paving the way for interest rate rises outside of the Reserve Bank’s moves.
Speaking to shareholders at the AGM, Mr Norris said operating environment remains “challenging” given economic uncertainty here and offshore, regulatory changes and competitive pressure.
But he was confident the bank would lift earnings in the second half.
Reserve Bank credit growth figures are showing that housing credit growth is slowing, while business lending is contracting and credit car use by retail customers is also sluggish.
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The CBA has been forced to trim some fees (such as so-called exception fees or penalties on bouncing checks and credit card transactions) which is impacting income streams.
Mr Norris said higher funding costs are one of the major outcomes of the global financial crisis.
“Funding costs are now significantly higher for Australian banks than they were prior to the GFC, and this is likely to remain an issue for all banks in the short to medium term,” he said.
Despite these challenges Mr Norris said he was optimistic about the medium-term outlook for the Australian economy and Commonwealth Bank’s ability to deliver superior returns for shareholders, although he was not specific.
CBA chairman David Turner said the bank was determined to manage its business prudentially while improving its performance.
"In this context, we constantly need to balance the needs of our shareholders for strong dividends, with the needs of our customers," Mr Turner said.
He described the CBA’s results for the past year as "very good" but not excessive.
Both Mr Turner and Mr Norris said that lending to business – one of the main drivers of group profits – has still to recover to its previous GFC levels and the chairman hinted that earnings growth will be hard pushed to get close to last year’s pick-up.
The slowdown in lending had become evident in the bank’s last quarter of 2010 and that had continued into the first three months of the new year as doubts had re-emerged about the pace of recovery in the US and Europe, Mr Turner said.
"These risks have not helped domestic business and consumer confidence and both remain fragile,” Mr Turner said.
He said that with the momentum in credit growth faltering, the bank must, in turn, remain cautious about the prospects for its own business for the rest of current financial year.
In his speech Mr Norris also said the recent improvement in credit quality (which helped boost earnings to a record $6.1 billion) has continued into this year.
But he said profit margins however have come under pressure as a result of the slowing credit environment.
That’s why so many banking analysts are not bullish on banks for the coming year.
