Funding pressures are not going away

Commonwealth Bank chief executive Ralph Norris warned yesterday that banks' funding costs are still rising. Delivering the bank's results for the six months to December, Norris said retail funding costs had increased by 118 basis points since the start of the financial crisis and long-term wholesale funding costs (plus basis risk) had risen by 104 basis points.

He said funding cost pressure would continue as cheap long-term funding continued to mature and retail funding remained very competitive.

The current price for three-year wholesale funding is 105 basis points over the swap rate and for five-year funding it is 140 basis points.

In response to price competition in the retail deposit market, the Commonwealth allowed growth in household deposits to fall below system. The bank's household deposits increased by 4.3 per cent in the year to December compared to system growth of 8.7 per cent, and 3.4 per cent (annualised) for the six months to December compared to system growth of 10.2 per cent.
 
Norris said: "The pressure is not going to diminish any time soon."

The bank reported a net profit of $2.9 billion, an increase of 13 per cent over the previous corresponding period. Commonwealth completed its takeover of BankWest in December 2008 and for its cash and underlying earnings figures it has provided a pro-forma comparison including BankWest figures for the December half 2008.

On that basis, cash earnings were up 46 per cent from $2.01 to $2.94 billion and underlying earnings were up 32 per cent to $2.8 billion.  (Cash earnings were, for once, more or less the same as the reported statutory net profit.)

CBA's return on equity jumped from 13.5 per cent in the December half 2008 to18.5 percent in the latest half.

There was a fall in the impairment expense, from $1.9 billion in the December half in 2008 to $1.4 billion in the latest half.

The impairment expense represented 55 basis points of gross loans and acceptances, down from 61 basis points at June 30 and 85 basis points a year ago. The improvement was largely due to a reduction in provisions for single name corporate exposures.

However, provisions increased four-fold for consumer lending even though arrears levels have improved a little.

Norris said the bank was through the worst of the bad debt cycle but the move to lower impairment levels would be slow.

The biggest of the bank's divisions, retail banking, reported an 11 percent increase in earnings. Commonwealth has a 26 per cent share of the home loan market, up from 23.2 per cent a year ago (BankWest share included). New home lending grew above system through the half, at 20.4 per cent.

 Credit card share increased from 20.9 to 21.9 per cent.

Business and private banking (which includes CommSec) earnings were up 18 per cent. Business lending share rose from 18.2 to 18.8 per cent and asset finance share rose from 12.8 to 14.3 per cent.

BankWest moved from a loss of $110 million to a profit of $64 million.

Institutional banking and markets recovered from a $168 million loss to report a profit of $545 million and wealth management doubled its earnings to $379 million.

The bank's net interest margin rose two basis points to 2.18 per cent, with some of that gain due to asset pricing changes.