Far from being a profit-gouging giant, the latest quarterly trading update from the Commonwealth Bank reveals that it is more a profit-drifting giant, perhaps becoming enfeebled by its sheer size and position in the Australian market.
For the past four consecutive quarters, the CBA’s cash earnings have not gone anywhere fast, relying on falling bad debts and lower loan loss provisions to generate earnings momentum.
The bank yesterday revealed cash earnings of $1.6 billion in the three months to September 30, 2010.
According to the bank’s previous filings, it made $1.4 billion in the September quarter of 2009, just over $1.5 billion in the next quarter, around $1.6 billion in the March quarter of this year and nearly $1.6 billion in the June quarter.
So although it is still an awful lot of money, there’s been no obvious impetus behind the rise in profits apart from the continuing improvement in the bad debts and loan loss provisioning.
Net interest margin in consumer banking fell to what the bank said was an all time low of $2.15 in the quarter from 2.19% in the June quarter.
That’s why the bank lifted the standard variable home loam rate by 0.45% on Melbourne Cup day after the RBA’s 0.25%.
Again, none of the chat and comment yesterday mentioned the position of depositors who will get a rise.
With interest margins under pressure and fee income cut (because of the elimination of some fees like overdue penalty payments) the CBA’s earnings have hardly changed from $1.6 billion a quarter in the first nine months of 2010; in other words, the bank is all but standing still.
Bad-debt charges totalled $321 million in the September quarter.
It said operating conditions remained "challenging" in a background of slow credit growth in an environment of firms reducing debt and cautious customers – both consumer and businesses.
The bank said it kept its discipline with costs, while growing the deposit base.
"As we indicated at our FY10 full year results announcement in August, operating conditions remain challenging," Commonwealth Bank’s Ralph Norris said in a statement.
"Credit growth remains muted, and margins continue to come under pressure from higher average funding costs and price competition.
"Whilst we have passed the peak in the bad debt cycle, improvement in key credit quality indicators continues to be gradual, rather than dramatic."
The bank said customer deposits represented 59% of group’s total funding.
Mr Norris said the company performed well during the quarter as it kept costs under control.
"As we indicated at our full-year results, we expect a gradual improvement in operating conditions in the second half of this financial year, as the economic recovery strengthens and system credit growth rebounds," he said.
The shares rose 31c to $48.86 on a day when the market drifted a little, rose and ended down slightly.
