The Commonwealth Bank remains on track to produce yet another record profit result this year after turning in third quarter earnings of $1.7 billion yesterday.
That was helped by a $300 million reduction in the impaired assets provision in the quarter.
A year ago the CBA reported a cash profit of $1.5 billion for the three months to March 2010, with an impairment expense of $500 million.
So without the $500 million impairment charge, the CBA would have had cash earnings of $2 million in the March 2010 quarter. Compare that to the March 2011 quarter which saw earnings of $1.7 billion, thanks to a $300 million drop in impairment expenses. Deduct that and you get cash earnings of around $1.4 billion.
On that basis the result in the March 2011 quarter was worse than a year ago.
The profit estimate in yesterday’s third quarter update means the CBA has already earned $5 billion this financial year after the $3.3 billion made in the six months to December.
Another quarter like the March three months will see the bank easily beat the $6.1 billion of cash earnings in the 2010 financial year.
After an early dip, investors got onboard the bank’s story and the shares rose 32c to close at $52.32 yesterday.
The bank listed the following as the major factors in the quarter.
"Asset growth was fully deposit funded, with customer deposits as a proportion of total Group funding further improving to 61 percent;
"Fragile consumer and business confidence is reflected in subdued credit demand, notwithstanding some tentative signs of improvement in system business credit growth in recent times;
"CBA performed strongly in business lending, reflecting its status as one of the Group’s five core strategic priorities and ensuring the Group is well placed to take advantage of an expected improvement in sector credit demand through calendar 2011 and 2012;
"Group Net Interest Margin improved further following asset repricing in the first half in response to a sustained elevation in average funding costs;
"Credit quality trends remained broadly consistent with those reported at the Group’s half year results in February. Total impairment expense was lower at 24 basis points of total average loans, or approximately $300 million in the quarter;
"Credit quality in the corporate and business portfolios continues to improve, with favourable trends in key indicators, including impaired assets, portfolio ratings migrations and watch list loans. Consumer credit quality also remains very sound, notwithstanding a modest uptick in home loan arrears, reflecting a combination of factors including the impact of severe weather events, normal post-Christmas seasonal factors and the seasoning of 2008 vintage loans;
"Given ongoing economic uncertainty, economic overlays have been retained in the loan impairment provision, with total overlay provisions unchanged at $1.2 bn;
"The Group’s provision coverage ratios remain sector leading, with the ratio of Total Provisions to Credit Risk Weighted Assets further improved to 2.28 percent;
"Strong organic capital generation saw the Group’s Tier 1 capital ratio improved by 19 basis points to 9.90 percent, or 13.2 percent on a UK FSA basis."
Commenting on the March quarter, Commonwealth Bank of Australia chief executive officer Ralph Norris said: "As we indicated at our half year results announcement in February, operating conditions remain challenging".
That’s similar to what the heads of the ANZ, NAB and Westpac said last week. All think the Reserve Bank should raise rates again, as looks likely.
But all four lifted their rates last November by nearly double the 0.25% rate increase from the RBA, so the big four share as much blame as the central bank does for the downturn in retail spending and increased consumer caution.
Mr Norris said yesterday that, "Whilst the Australian economy continues to perform relatively well, consumer and business confidence remains fragile, resulting in subdued spending patterns and muted system credit growth.
"Overseas, the residual impacts of the Global Financial Crisis are still being felt and this is weighing on the pace and direction of the global economic recovery".
"Against this background, the Group performed well, with key trends remaining broadly consistent with those experienced through the first half of the year. The Group continues to deliver strong financial outcomes, highlighted by solid income growth and a gradual improvement in credit quality. Whilst system credit growth remains relatively subdued, business credit showed signs of improvement in the quarter.
"Across all segments of our business the effective execution of our strategic agenda is driving consistently good financial outcomes, positioning the Group well for future growth.
"Whilst the shape and direction of Global regulatory changes are becoming clearer, some uncertainty still remains. Given this uncertainty, the Group is retaining its conservative business settings, with capital, provisioning, funding and liquidity levels all remaining strong.
"Notwithstanding present challenges, we continue to expect a gradual improvement in operating conditions through calendar 2011, as the economic recovery
