Four years ago, the Commonwealth Bank’s share price was $51 and the interim profit was $2.2 billion.
Yesterday, the bank’s share price closed at $55.07 (having risen $1.15) and the profit was 50% higher at $3.34 billion (on a cash profit basis) and another record.
It means the bank is heading for a record full year profit of over $6.6 billion ($6.04 billion in 2010).
Sound impressive, but we also have to remember that the CBA’s share price peaked in November of 2007 at around $62.17.
The company’s dividend payments are back on track after the GFC, the interim was yesterday boosted 10% to $1.32 a share (61.7% of net earnings), pointing to a possible $3 a share for the full year ($2.90 in 2009-10).
In the year the shares peaked (2007-08, as the GFC gathered pace); the dividend was $2.56 a share.
So despite earnings being higher and the dividend recovering, there’s still the best part of a 10% rise needed for the share price just to regain the previous all time high, let alone rise further to reflect the improvement.
No matter which way you look at it, the CBA is a reliable performer, even if it remains cautious about everything, including the outlook.
But it must be pointed out there remains a good reason for this conservative pricing for the CBA.
First off it is not alone, other banks here and offshore are in a similar position, share prices weak despite rising profits.
The CBA and others are still viewed with hesitation by many investors after the experience of the GFC when it was the banks that led the market lower (and destroyed the Irish economy and helped drag the US and UK into deep recession).
Those fears haven’t gone away and the lingering doubts about the stability of the euro, Ireland, Greece and Portugal are also lingering doubts about the stability of the various banking systems and its members, in Europe and elsewhere.
And once you get into the accounts, it’s easy to see why earnings and dividends are up on four years ago; bad debts continue to fall away.
Just as the National Australia Bank’s good first quarter update was really driven by a drop in bad debts, so was the Commonwealth’s.
The bad debt provision fell $661 million or 48% to $722 million in the December 31 2010 half year, from the larger $1.383 million in the six months to December, 2009.
And if you take total operating income for the December 2010 half year of $9.739 billion, deduct the operating expenses of $4.408 billion; you get a gross operating profit of $5.331 billion (which is before bad debts). That’s actually $93 million below the figure for the December 2009 half year of $5.424 billion.
It’s not much of a difference, but it does show that in terms of its basic banking business, there hasn’t been much improvement, except in the continuing improvement in bad debts, thanks to the better conditions in the economy and globally.
Total income growth was flat (revenue was up 2%, investment income was lower). Expenses rose 1.4%; the net interest margin for the half year was 2.12%, down 0.06%.
Yesterday’s 2% plus jump in CBA shares took the rise so far this year to more than 8% and the close was the highest in nine months.
Looking at how the various bits of the bank went, the CBA said:
Retail Banking Services cash net profit after tax was $1,383 million, which represented an increase of 12 percent on the prior comparative period. The result was driven by solid volume growth, a sustained focus on cost efficiency and lower impairment expense. This was partially offset by continued margin compression as a result of increasing average funding costs, with the divisional net interest margin decreasing by 10 basis points.
Home loan average volume grew by 8 percent, however new lending growth continued to moderate across the sector. Retail deposit income, which was impacted by continued term deposit margin compression together with the reduction in exception fees in October 2009, decreased 13 percent. Retail deposit average volume growth was strong, up 11 percent.
Business and Private Banking delivered a cash net profit after tax of $506 million, a 15 percent increase on the prior comparative period. The business banking segments contributed significantly to this result, experiencing solid growth in lending volumes, improving deposit margins and lower impairment expense. CommSec maintained its market leading share of the online advisory market despite lower overall market volumes which impacted equities trading volumes.
Institutional Banking and Markets reported a cash net profit after tax of $512 million, which represented a 7 percent decrease on the prior comparative period. This was the result of a fall in operating income due to lower trading activity in Markets in a less volatile environment and the impact of the decline in lending balances in Institutional Banking.
Wealth Management’s underlying profit after tax increased 12 percent to $329 million. This result was underpinned by solid growth in the funds management businesses while the insurance business delivered robust margins. Funds under Administration as at 31 December 2010 were $191 billion, up 3 percent driven by solid investment returns and strong net flows from the international business, partly offset by the strengthening of the Australian dollar.
Cash net profit after tax was $359 million, which represented a 5 percent decrease, mainly due to the unwinding of unrealised annuity mark to market losses on the Guaranteed Annuities in the prior comparative period.
New Zealand cash net profit after tax f
