Fabulously rich, becoming fabulously richer
By MICHAEL PASCOE | smh.com.au | 12 August
It’s hard to know where to begin with the incredible story of strength and wealth demonstrated by the Commonwealth Bank’s annual results – a colossal institution that is fabulously rich and set to become fabulously richer, one that has made the very most of the global financial crisis, a tour de force by CEO Ralph Norris.
There should be some very red faces among the overpaid but demonstrably inept banking analysts when so many of them in recent months have been bearish on Australian banks with price targets below the market. It’s been an interesting tussle between Mr Market and majority of the supposed experts – and the CBA numbers point to Mr Market having been right.
It’s also hard to keep up with the relative strength of the Australian banking sector. Early in the GFC there was some comfort in Australia having four of the world’s 20 AA-rated banks. And then it was four of the 18, then 16 (gee, 25 per cent), then 12 ( a third!), then 10. Now, the CBA reminds us, it’s four out of just eight – half. Amazing.
And if we want to tempt hubris about the strength of our financial sector, we can also claim to have 100 per cent of the world’s AAA-rated banks active here – the Dutch Rabobank. So make that five out of the world’s top nine banks busily making rich profits and making credit available, playing a very important role in Australia avoiding anything more than a very mild recession.
But, having paid abeyance to the great benefit of having such strong institutions – and acknowledging the roles of APRA, the RBA and luck in that – it is then possible to wonder about the competitive landscape coming out of this slowdown when so much market share has been grabbed by the Big Four in general and the CBA in particular.
The CBA now has more than 25 per cent of the Australian home loan market – an extremely profitable and very low-risk business. Its share of household deposits is 32.3 per cent, approaching one-third of the market. It has 63 per cent of all on-line equities trading and a large whack of the funds management and life insurance industries.
Operating profit has soared in the face of the worst global economy since the Big D. Never mind the increase in bad debt provisions - the CBA money-making machine can afford it thanks to the enormous depth of the retail book.
And, the CBA tells us, the bonanza has been achieved while increasingly satisfying customers.
What chance then for competition against such power and might when the non-Big Four’s sources of funding either don’t exist any more or are uncompetitive? Not good.
In no particular order then, a few of the highlights of this amazing set of numbers:
+ Total operating income jumped 14 per cent while banking income soared 21 per cent and all at very little expense. Total expense growth is just 4 per cent, but it’s actually much better than that with 150 points classified as a “one-off”. The banking expense-to-income ratio plunged from 45.3 per cent to 39.7 - take a very big bow the CBA rank and file as the cost of staff increased just a miserable 1 per cent while they accomplished so very much more work.
+ One fascinating graph in the CFO’s presentation to analysts breaks down the impact of two years of GFC on product profits – the bank says its home loan business has profited by $150 million on the crisis, its deposit side has gained $550 million from it and personal lending $100 million. Only business lending has suffered a loss - $1 billion worth – but I’d argue that the obvious suspects on the CBA’s single name register of dud loans were fundamentally flawed and would have found trouble anyway.
+ Stand back and watch the money roll in – just the lending fees June half on June half leapt 44 per cent to $731 million.
+ Funny thing about the different ways of reporting a profit. The banks tell us the “cash profit” is the best indicator – it was the one down 7 per cent thanks to the bank’s dumb big name loans – the retail banking cash profit was up 10 per cent. The operating profit after tax was off just 1 per cent, but there’s another good measure: the impression you get from how much tax has been paid. Tax and minorities were only down 3 per cent.
+ There’s a little schizophrenia about the BankWest contribution, with the CEO’s presentation pointing to what an absolute steal the thing was, but the CFO’s numbers showing what a significantly higher percentage of impaired assets BankWest carried. It was still a bargain.
+ The CBA is careful to play down the small increase it enjoyed in net interest margin, preferring to point to it being “sort of” flat over two years. It still means there’s less competition. And NIM would be higher if the Big Four weren’t paying more than they really have to for deposits with retail rates on offer above the cost of wholesale market funding.
+ Don’t worry about any headlines featuring the 25 per cent cut in dividends – that is just as foreshadowed earlier this year when the CBA led the way on softening shareholder expectations. Look ahead instead at a bank that can afford to put those bad debts behind it and feast upon its improved market share.
+ The CEO makes the usual responsible noises about uncertainty and rising unemployment, but note that even credit cards in arrears are only at the same level that there were in 2006/07. Yes, home loans in arrears have picked up in percentage terms, but from almost nothing to a bit more than almost nothing. And while unemployment will rise a little more, remember than employment remains remarkably steady.
+ There was a mention of emerging softness in the commercial middle market – confirming a conversation I recently had with one of the country’s top receiver managers. The race is now on, though with improving business confidence and upwardly-revised economic growth to stop that emerging trend becoming anything more serious.
Michael Pascoe is a BusinessDay contributing editor
First published by Smh.com.au on August 12 2009
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