CBA's ROE takes a dip

The big surprise in Commonwealth Bank's financial report delivered yesterday was the fall in return on equity. While most analysts had correctly predicted that the bank's cash profit would come in at between A$7.1 and $7.2 billion, they also expected the bank would maintain its ROE at above 19 per cent.

The bank's ROE, on a cash basis, was 18.6 per cent (18.7 per cent on a statutory basis) for the year to June 2012. This was down 90 basis points from 19.5 per cent in the previous year.

The lower return was a result of the bank increasing its capital during the year and a sharp reduction in earnings from its market operation.

Analysts were keen to know what the bank's expectation was for ROE in future.  Commonwealth Bank's chief executive, Ian Narev, said he did not have a "line in the sand".

Commonwealth reported a net profit of $7.09 billion for the 12 months to June - an increase of 11 per cent on the 2010/11 result.

Cash profit, the bank's preferred measure, was $7.1 billion - up four per cent on the previous year.

Conditions weakened in the second half of the year. Half-on-half, net profit was down four per cent, and on a cash basis it was down one per cent.

Total income rose two per cent to $20.1 billion. Operating expenses rose by more - up three per cent to $9.2 billion. Expenses were down 0.2 per cent in the second half.

The bank's loan impairment expense was down 15 per cent to $1.1 billion. The ratio of loan impairment expenses to gross loans fell from 22 basis points in 2010/11 to 20 basis points in the year to June

In consumer lending, the ratio fell from 19 to 15 basis points, and, in corporate lending, the ratio fell from 39 to 32 points.

Home loan arrears (payments 90 days or more overdue) also fell, as the bank resolved long-standing productivity strife with its collections area. CBA said that its measure of arrears already took into account hardship cases, unlike some other banks.

The net interest margin fell three basis points, from 2.12 per cent in 2010/11 to 2.09 per cent in the year to June. NIM was down to 2.06 per cent in the June half.

On the funding side, customer deposits of $379 billion represented 62 per cent of the group's total funding, up from 61 per cent the previous year.

Growth in customer deposits of $30 billion were more than enough to cover the $25 billion increase in lending over the full year, though the bank did not fully fund lending growth from deposits over the second half.

The bank increased the average term of its wholesale funding to 3.7 years and boosted liquid assets by 34 per cent to $135 billion, though the level of liquids remained static over the second half.

The move to longer term wholesale funding increased the bank's costs. At June, the margin over the bank bill swap rate for two-year wholesale money was 106 basis points, while the margin for four-year money was 153 basis points.

Among the bank's divisions, retail banking services, which contributes around 40 per cent of total earnings, increased cash earnings by three per cent compared with the previous year.

Business and private banking was up four per cent, institutional banking and markets was up six per cent, New Zealand was up four per cent and Bankwest was up 13 per cent.

Wealth management faced another year of difficult conditions and reported an 11 per cent fall in profit.

The bank provided an outlook statement that read literally implies that it expects revenue to decline in 2013.

Asked about this, Narev said: "Look, we're pretty conservative. The way we look at things, at the moment, we've got the Australian dollar effect. We can clearly see that in terms of uncertainty, which is impacting the markets' businesses.

"I don't think anybody here has yet got a better view than they had when we were here six months ago about how Europe works itself out.

"We're just working on a base scenario that things are going to keep pretty rocky, as they are at the moment, which is okay; system growth on credit, continuing pressure on margins, because of funding costs and competition; and continuing issues with the markets businesses, because that uncertainty is just going to keep flowing through into them."