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CBA’s mixed bag leaves analysts unmoved

Analysts took some positives from the release of Commonwealth Bank’s 2017/18 financial report last week, including a better than expected interest margin, low impairment expenses, a strong capital position and a higher dividend.

However, the low-growth outlook for the bank remains, as costs rise faster than revenue in some parts of the business and its market share in key product categories, such as home loans, declines.

For the year to June, the bank earned revenue of $26.1 billion – an increase of 3 per cent of the previous year. Net profit of $9.3 billion was down 6 per cent on the previous year.

CBA’s net interest margin rose five basis points on the previous year to 2.15 per cent. The increase was due to repricing of interest-only and investor mortgages. It was also supported by a change in the bank’s funding mix, with stronger growth in at-call deposits.

Return on equity was 14.1 per cent – down from 15.7 per cent the previous year.

The bank’s performance was affected by higher regulatory expenses, an Austrac (anti-money laundering) charge of $700 million.

The bank’s impairment expense was $1.1 billion, which was 15 basis points of gross loans and expenses – unchanged from the previous year. The impairment expense is at its lowest point for 10 years.

The bank paid a final dividend of $2.31 a share, taking the total dividend payout for the year to $4.31 a share. This was an increase over the $4.29 a share it paid the previous year. CBA paid 80.4 per cent of its cash earnings in dividends.

The bank’s cost-to-income ratio increased, with operating expenses as a percentage of total operating income rising from 42.1 per cent in 2016/17 to 44.8 per cent in the year to June.

Macquarie Securities has upgraded its earnings forecasts for CBA next year and its share piece target. It expects the bank to report cash profit of $10.1 billion in 2018/19 and $10.3 billion in 2019/20.

Its 12-month share price target for the bank has gone up from $75.50 to $76.50 (the share piece closed at $75.39 on Friday. But Macquarie left it rating on the stock at ‘neutral’.

While Macquarie described the result as “satisfactory”, it also said there were some disappointing aspects. CBA’s mortgage lending grew 3.7 per cent over the year, compared with average growth of 5.6 per cent for the industry overall.

The bank’s business loan outstanding fell 0.6 per cent, compared with overall market grwth of 3.2 per cent. It also lost share in household deposits.

There was an increase in home loan arrears (payments overdue by 90 days or more) from 60 bps in 2016/17 to 70 bps in the year to June. The bank said this was due to “some households experiencing difficulties with rising essential costs and limited income growth, leading to some packets of stress.”

And the bank’s core retail banking division suffered from lower grwth and tighter margins.