By Danny John
A CONTINUING fall in bad debts has masked a small drop in underlying profits in the last quarter at the Commonwealth Bank, although the country's largest financial institution remains on course to produce record annual earnings of $6 billion.
The bank racked up impairment charges of $500 million in the three months to March 31. The figure matched the trend of steadily lower rates of growth in bad debts, which had the chief executive, Ralph Norris, declaring that the cycle of sour loans had peaked.
Further falls would be ''gradual rather than dramatic'', Mr Norris said at a trading update yesterday.
The improvement in the bank's bad debt position helped the group to an unaudited third-quarter cash profit of about $1.5 billion.
Added to the net earnings of $2.94 billion recorded for the half-year to December 31, CommBank's profits stand close to $4.5 billion, with analyst expectations of another $1.5 billion at the end of the financial year.
Its finance director, David Craig, cautioned investors not to extrapolate the most recent figure to forecast a full-year result given that the bank was experiencing various ''headwinds'' in the second half.
He said a $50 million to $60 million drop in revenue caused by slashing account fees, wage increases of 2 per cent for the group's 38,000 employees and fewer trading days would squeeze margins over the next two months. This had also contributed to the fall in underlying earnings since January.
''It's a blend of all of those things that add up to a slight downtick,'' Mr Craig said.
The Deutsche Bank analyst James Freeman told clients in a note on Tuesday that while lower bad debt charges would help boost the quarterly profit outcome, the Commonwealth Bank's margins would have slipped as a result of the pressures facing all the major banks.
This was highlighted by Westpac, ANZ and National Australia Bank in their half-year results in the past fortnight.
Nonetheless, CommBank said all its operations had contributed positively to the better earnings picture although bad debt charges remained high at BankWest due to its exposures to the troubled property development sector.
Volume growth had been good, particularly in deposits, which now make up 59 per cent of the group's funding needs, and the bank was more than holding its own in the home loan market.
Levels of repayment arrears across its mortgage, credit card and personal loans had remained steady or begun to fall in line with the recovery of the economy.
However, Mr Norris remained cautious and used the example of the debt crisis in Greece to illustrate the uncertainties afflicting the global economies.
''Recovery from the GFC will take time and there will be challenges along the way,'' he said.
Shares in Commonwealth Bank fell 55¢ to $54.30.