Commonwealth Bank has unveiled a slight increase in cash net profit for the first half of the 2019 financial year to $4.676 billion as the group accelerates its transformation into a digitally-focused and more customer-orientated business.
The group saw income growth in its core franchises of home lending, volumes up 4% and business lending, ahead by 5%. The result covers the six months to 31 December 2018 with the cash profit reflecting a good underlying performance of its core continuing operations including an 8% increase in transaction deposits. CBA also achieved strong organic capital generation.
The continuing cash profit – which is the measure of the performance of the underlying businesses that make up the future of the company – was up 1.7 per cent on the prior corresponding period. That was achieved despite a 4 basis point decline in net interest margin 1H19 on 2H18, a result of higher funding costs and home loan switching.
The half year profit figure was also struck against a small decrease in operating income, down $235 million or 1.9%, to $12.4 billion, with the effects felt of the lower net interest margin, a reduction in markets and fee income and the impact of weather events on insurance earnings.
Operating expenses were 3.1% lower at $5.29 billion, with elevated risk, compliance and remediation costs offset by prior corresponding period one-offs.
The fall in operating expenses translated to a cost-to-income ratio of 42.6%, an improvement of 60 basis points over the prior corresponding period. The company is targeting a lower absolute cost base and a cost-to-income ratio below 40% as part of its transformation agenda.
Loan impairment expenses were also 3% lower year-on-year at $577 million in a reflection of the good credit quality of the group’s overall loan book.
Earnings continued to be driven by the group’s main operations, Retail Banking Services with a $2.23 billion contribution. But that was down 10% on December 2017 primarily due to lower home lending margins as a result of higher funding costs, switching and competition.
Business and Private Banking turned in earnings of $1.4 billion, down 3%, Institutional Banking and Markets $580 million lower by 5% as it optimised its portfolio while New Zealand contributed a 12 per cent increase at $539 million.
Announcing the result on 6 February, CEO Matt Comyn said: “CBA continued to deliver strong core business outcomes in a challenging period. The highlights included robust transaction deposit growth and strengthened balance sheet resilience with the Bank now above ‘unquestionably strong’ capital requirements.
“We maintained our focus on being best in digital and achieved leading rankings for the CommBank mobile banking app and for digital customer advocacy. We are also on track to deliver a more focused portfolio of business in line with our competitive advantages.
“Our transformation to be a simpler, better bank is well underway. There is a lot of work to do but we will continue to take action to address issues, earn trust and be a better bank for our customers, as we strengthen risk management, invest in core business growth, and deliver long-term sustainable returns for shareholders.”
Around 95 per cent of group profit was generated by the core banking businesses. Businesses listed as discontinued operations – and therefore excluded from the ongoing cash profit figure for accounting reasons – include the Australian, New Zealand, Chinese and Indonesian life insurance businesses, asset manager CFSGAM, and South African banking arm TymeDigital.
The continuing cash profit outcome represented a return on equity of 13.8%, down 40 basis points in the reporting period from 14.2%, and earnings per share of 265.2 cents, up slightly by 0.9c.
Shareholders will receive the same interim dividend payment as last time after the Board declared a fully-franked interim dividend of $2 a share, which is a payout ratio of 74.3% of cash net profit after tax. The dividend will be paid on 28 March 2019. The Dividend Reinvestment Plan is anticipated to be satisfied by an on-market purchase of shares.
The group will also pay tax of $1.9 billion, which is equivalent to an effective tax rate of 28.5%.
The first half of FY19 was also notable for good organic capital generation which increased the group’s Common Equity Tier 1 (CET1) capital ratio to 10.8%, up 70 basis points on June 2018. That placed the bank above the Australian Prudential Regulatory Authority’s “unquestionably strong” average benchmark of 10.5%.
Using internationally comparable standards, CBA has a CET1 capital ratio of 16.5%, one of the strongest amongst its global peers. The CET1 capital ratio is expected to be further boosted in the coming period by the sales of the life and asset management businesses which are expected to add approximately 120 basis points of CET1.
CBA CEO Matt Comyn image courtesy AAP, not for download or reproduction