CBA take control of its loan pricing

Commonwealth Bank chief executive Ian Narev confirmed that prior to the bank's decision to raise home loan interest rates it was writing mortgages at a loss.

Narev said the bank's move this month to increase variable home-loan rates by 10 basis points will only recover part of the cost increase of the past six months.

However, he rejected any suggestion that the bank would ration household credit.

Narev presented CBA's results for the December half last week. Net profit rose 19 per cent, from A$3.05 billion, in the six months to December 2010, to $3.6 billion in the latest half.

After adjusting for unrealised hedging gains and some other non-cash items, cash profit for the half was $3.57 billion – up seven per cent on the previous corresponding period.

Since June 2007, the bank's cost of wholesale funds has gone up by 45 basis points. The cost of deposits has gone up by 12 basis points over the same period.

The bank's chief financial officer, David Craig, said the weighted average cost increase was 25 basis points. "We have passed on 10," he said.

Craig said: "Funding costs are going to continue to grow as we replace old funding with new funding at higher margins."

Narev said: "In this interest rate environment home loans are not as profitable as they were. But we have an appetite to grow in that market. We are not rationing."

Narev also said he thought the process by which home loan interest rates were set had changed. "People should not expect their mortgage rates to go up and down in line with [changes to] the official cash rate," he said.

The bank's home loan income fell four per cent year-on-year. Its market share has fallen from 26 to 25.8 per cent over the past year.

CBA take a different road to productivity

The Commonwealth Bank chief executive Ian Narev said he has no plans to retrench any of the bank’s 45,000 staff or send their jobs overseas.

Narev declared he had a strong commitment to continuous improvement in the business. "In the economic environment we are in we need to be a lot more productive," he said

"But we believe the way to do that is not by taking a red pen and cutting things out. That approach does not deliver sustainable productivity improvement."

The bank reported "flat jaws" during the December half, which means that income and expenses increased at the same rate.

Analysts at last week's December half results briefing queried whether the bank could do more to reduce expenses by cutting its big information technology investment budget and rationalising the branch network.

The bank’s investment spend during the December half was A$647 million. A third of that went on its long-term core banking modernisation.

Narev said investment in the project would start to tail off by the end of the year. "Once core banking tails off it frees capacity but we will not look to spend that money somewhere else."

Analysts have been questioning the wisdom of continuing to invest in the branch network when demand for household and business finance is expected to remain weak and electronic services are being taken up by an increasing number of customers.

Seven per cent of the bank’s investment spending during the half went on branch refurbishment.

Narev said: "We do talk a lot about technology but the reality is that the branch channel is critical.

"We are giving a lot of thought to how the role of branches is changing. We still have an appetite to invest there."

Narev was unapologetic about the growth in staff numbers during the past year. In the past 12 months, staff numbers (full-time equivalents) grew two per cent, from 45,025 to 45,810.

"If the current weak trading conditions continue and revenue levels remain flat, the bank would look to operate with fewer people. But that would be achieved through natural attrition, which is about 3000 people a year.

"If revenue grows we still might have growth in FTEs," he said.

He said the bank had achieved significant productivity improvements in mortgage processing, the call-to-fulfilment ratio in the Bankwest call centre and transaction processing in the investment operations.

CBA results at a glance

Commonwealth Bank's net profit rose 19 per cent, from A$3.05 billion, in the six months to December 2010, to $3.6 billion in the latest half.

After adjusting for unrealised hedging gains and some other non-cash items, cash earnings for the half were $3.57 billion – up seven per cent on the previous corresponding period.

Operating income rose 4.1 per cent and operating expenses rose four per cent.

The net interest margin rose from 2.12 per cent in December 2010 to 2.25 per cent in June and then fell back to 2.15 per cent at the end of the latest half.

The retail banking margin fell nine basis points year-on-year – falling from 2.39 per cent to 2.3 per cent.

The reduction in margin was due almost entirely to higher funding costs.

The loan impairment expense fell from $722 million in December 2010 to $545 million in the latest half. On other measures of credit quality, gross impaired assets were down nine per cent and impairment expenses as a percentage of average gross loans and acceptances fell from 28 basis points to 21 basis points.

Commonwealth Bank chief executive David Craig said that "on all measures of consumer arrears, the arrears are coming down."

Earnings per share (on a cash basis) rose six per cent.

Return on equity was 19.2 per cent – unchanged from the previous corresponding period.

The bank’s cost-to-income ratio rose 40 basis points, from 45.4 per cent to 45.8 per cent. The cost-to-income ratio in the group’s biggest division - retail banking services - fell from 38.7 per cent to 38.3 per cent.

The tier-one capital ratio increased from 9.71 per cent to 9.9 per cent.
 
The profit contribution from retail banking services, which accounts for almost half the bank’s earnings, was up three per cent on the previous corresponding period. However, the division’s profit fell one per cent from June to December, reflecting higher funding costs.

Business and private banking earnings were up 10 per cent, institutional banking was up 10 per cent, New Zealand banking was up 10 per cent and Bankwest's earnings were up 20 per cent.

Wealth management took a hit from volatile investment markets. Its contribution to the group result fell 24 per cent.

The bank has 2.7 products per customer and claims industry leadership on this metric.

The proportion of deposit funding increased from 60 to 62 per cent.