Determined To Be Different, Cba Posts Positive News Despite Credit Crunch

The Age

Thursday August 14, 2008

Michael West mwest@fairfax.com.au

The 'four pillars' policy has given us a banking oligopoly among which CBA is the richest of its peers.

THIS is supposed to be the biggest crisis in financial markets and global banking for decades. Yet, Australia's big banks are sailing through it with record earnings, analysts are predicting further growth next year and the biggest bank of all, Commonwealth Bank, has just handed down a hulking $4.8billion net profit.

It really makes you wonder what part of the cycle you are in. Things will get worse, but the robust shape of the nation's major banks can be put down in part to Government policy, in particular the "four pillars" policy, about which banking chiefs complained during the good times. What irony.

The quid pro quo is an entrenched oligopoly that slugs the public for $10 billion in fees a year and shifts mortgage rates in lockstep.

With St George set to disappear down the gullet of Westpac, the Big Four consolidate further. This is survival of the biggest and, as CBA chief executive Ralph Norris said at yesterday's briefing, the non-bank lenders are "largely" gone from the market.

This credit crisis, then, is an opportunity for all the big banks; and the biggest bank of all has a unique chance to pounce on weaker players. CBA is on the prowl, make no mistake.

Norris confirmed as much yesterday: "We have a number of competitors which have different issues on their plate ... we are working on a number of opportunities."

His mergers and acquisitions team will have the likes of AMP on the radar in wealth management and St George on the menu in banking. If Westpac slips up in its friendly play for the Dragon, or suffers a rout in its stock price, CBA will be a contender.

CBA is the only one of the big banks whose scrip is rated in the same sphere as Westpac's. In fact, on 13 times forecast earnings, its share price does not look cheap, especially in light of forecast EPS growth of just 3% this year and the failure of management to provide guidance.

It totes a premium for its size, its market muscle and good management. Despite the blow-out in wholesale funding costs, CBA still managed a 10% rise in operating income in 2008. It has paid a price though for chasing market share. The deposit base rose from 54% to 58% as the bank touted high-rate products. And margins here naturally came under pressure.

The impairment charge was the focus of the result. As far as expectations went, the profit was roughly in line, but the provisioning figure is drawing attention. Analysts had forecast $800 million in provisions for bad debts; the actual provision came in at $930 million, up 114% on the previous year.

On outlook, Norris said credit growth was slowing but "the duration and extent of the slowdown is more difficult to predict". Mind you, when the credit crunch first bit this time last year he said the market had overreacted. That there was no specific earnings guidance, even a percentage range, says a lot. Norris is being careful and neither he nor anyone else has a clue as to how the economy will fare.

As the biggest bank in Australia's banking oligopoly, CBA is the best barometer of how the economy is travelling. Every number tells a story. There was a loss in wealth management - no surprise. Business banking was soft. Corporate banking margins came under pressure. Credit cards were strong as the bank had opted not to make zero-rate introductory offers.

Overall, the trend was best shown in earnings per share on a cash basis, which were actually down from 180.7 in the December half-year to 176.2 in the June half. Like its rivals, CBA has been issuing equity via dividend reinvestment plan underwritings and via hybrids to shore up its capital position. So, despite the higher headline numbers, shareholders have gone sideways over the past six months.

But you can bet they will fare better than consumers. Like the other banks, CBA will strive, above all else, to preserve its capital position and its share price. It will only reduce its own rates if the other banks also move. In this environment all the banks are unlikely to lower rates to the same degree the Reserve Bank eases.

CBA not only has the largest exposure to mortgages but the biggest exposure to the likes of Allco, Centro, MFS and ABC Learning. It is the main banker to City Pacific, which is teetering on the edge of extinction, and has frozen redemptions in its funds. It is also the key banker to Commander Communications, which appointed receivers last week.

Although charges are contained at this point, the pain will get worse. Loss rates remain well above the long-term average. CBA's capital stance is conservative. Tier I capital is 8.17%, and the provisioning contained about $212 million in "economic overlay" - keeping a bit in store, that is, for what is shaping up as a rainy year.

Costs rising 9% was a bit more than the market had been expecting and, breaking the figures down, the half-year profit of $2.4 billion was only 1% higher than the previous half, and it got there only with the help of a fortuitous drop in tax expenses. But, overall, it was a strong set of numbers given the economic backdrop.

The outlook is for credit growth to "moderate" further in both business and consumer banking. Two big factors contribute here: the global banking environment and the effect of higher funding costs; and credit growth and domestic demand for loans.

Against this there is the spectre that, should the economy have a hard landing and job losses ensue, mortgage defaults may wreak some damage on CBA profits - albeit less damage than on the smaller players.

© 2008 The Age

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