Systemic challenge for CBA
Commonwealth Bank will continue to aim for lending growth in line with system growth, a goal likely to reinforce the reversal in interest margins that was a feature of its trading update for the September 2011 quarter published yesterday.The bank reported cash earnings of A$1.75 billion for the quarter, in line with average of the last two quarters of its financial year, and, thus, a decline in profit as measured by return on assets.CBA said trading income was "approximately $60 million below the long term average in the quarter", with difficult conditions in financial markets in September wearing the blame for this outcome. ANZ reported a similar dip in trading income for the same month at its full-year result two weeks ago.The cash earnings figure disappointed several sell-side analysts in the conference call, some of whom later trimmed their profit projections for CBA for the year to June 2012. One drag on earnings that messed with analysts' models was the impact on the P&L of "interest rate risk in the banking book", which, in turn, relates to the mismatch in duration between the bank's assets and liabilities. The impairment expense was $256 million for the quarter, which compares with an average of $279 million for the two prior quarters.On credit quality, the bank said simply there were "further improvements in impaired assets, troublesome exposures and consumer arrears."The bank was less specific about margins, which, it said, had "declined marginally" on an "underlying group" basis over the quarter.CBA's margins had improved over the first six months of the calendar year 2011, thanks to the repricing of home loan interest rates in late 2010.Speaking in a conference call yesterday, the bank's managing director, Ralph Norris, said of the home loan market "there is no doubt it is still a very competitive market and certainly there is discounting going on."One lender discounting in this market is Commonwealth Bank, though perhaps no more so than any of its peers."That's what you expect in a market that's characterised by relatively slow growth," Norris said. "Certainly we are endeavouring to make sure we are balancing the margin."Norris said CBA was "pricing from the point of view that we don't see a lot of value in growing above market in this environment. Obviously there's the funding requirement that goes with that, as well as the costs."CBA said home loan growth was in line with system growth during the quarter, which it is, using the broadest measure produced by the Reserve Bank of Australia. The bank lost market share relative to all other banks, however, according to APRA data.One surprise for the quarter (and disclosed in the pillar 3 report on capital and risk) was a rise of six per cent in corporate exposures.Some of this relates to rising demand for business loans in the institutional bank, though some also relates to the bank's increased holdings of liquid securities.Norris also responded to one question, following up his own comments on the bank's options in Asia at last week's