By Eric Johnston
Commonwealth Bank retains its place as one the most profitable banks in the world on a measure of returns to shareholders. The tone of its $7.1 billion full-year cash earnings, though, is all about predictability over profit growth.
To cheer investors about an otherwise modest 4 per cent profit increase, Commonwealth Bank opted for a slightly better-than-expected final dividend of $1.97 per share.
And with the full-year dividend of $3.34, the outcome sees shares in the bank trade at a respectable dividend yield of almost 6 per cent.
And this fillip was enough to help support Commonwealth Bank shares which were already trading at a hefty premium over the rest of the bank sector. At one point, they were up almost 2 per cent before easing back to be 1.7 per cent higher for the day, or 94 cents, at $56.48.
The bank's result starts to bear the mark of new chief executive Ian Narev, who took charge from Ralph Norris last December. The changes, though, will be hard to spot as the internal baton change is yet to reveal any large write-downs or major restructuring of operations.
Norris legacy
Indeed, shortly after taking charge Narev promised investors certainty and pledged to see through the productivity and cultural change programs put in place by Norris.
The new chief intends to deploy new technology to win over customers and improve productivity, and the bank continues to invest heavily in these areas.
Mr Narev also stressed that keeping the bank safe remains a top priority. But as rival National Australia Bank confirmed yesterday at its quarterly results, the overall banking market remains in a funk with little sign of a pick up in demand for loans from businesses or consumers even with the slew of Reserve Bank-sparked rate cuts.
The chance for deposits, meanwhile, continues to pinch profit margins.
Slipping back
While Commonwealth Bank is widely regarded as the most efficient of the big Australian banks, it is not immune to the broader banking slowdown.
Indeed the cash profit $7.1 billion came in a touch below the average of analyst expectations of about $7.2 billion.
Meanwhile the bank has slipped back on revenue performance, which is likely to make investors a tad uneasy.
A big positive, though, was a sharp 15 per cent drop in the charge for bad debts, suggesting the economies where the bank operates remain resilient.
Negative jaws
The bank's revenue reflected the soft environment, up a mere 2 per cent for the full year and falling 1 per cent during the second half.
This outcome has resulted in some the so-called cost-to-revenue jaws turning negative, with expense growth flat during the second half but up 3 per cent on the full year.
As with most businesses, the aim in banking is to have revenue growth outpacing expenses.
The latest result was powered by Commonwealth Bank's flagship retail banking business which delivered 3 per cent profit growth on the year and a sharper 4 per cent increase on the half. Commonwealth Bank's business banking arm felt more pressure during the second half with profit falling 6 per cent.
Wealth management continues to be buffeted by the market with earnings down 11 on the year, but up 9 per cent on the half.
Margin pressure
Net interest margins are still clearly under pressure - given higher deposit and wholesale funding costs - and are down 6 basis points on the half and 3 basis points on the year.
With an end-June margin of 2.06 per cent Commonwealth Bank's interest margins are the thinnest of the big banks.
As they slide closer to the critical 2 per cent level, this trend suggests the bank's strategy of matching National Australia Bank on discounting home loans could soon come to an end.
Still, with a return on equity of 18.6 per cent - down slightly but a full two percentage points above its nearest Australian rival - Commonwealth Bank can continue to claim the mantle of one of the most profitable among the advanced economy banks.
This ranking is why shareholders continue to give CBA a premium rating.