Critics Set To Pounce On Big Cba Profit

Critics Set To Pounce On Big Cba Profit

The Age
11 February 2008
Danny John, Sydney

COMMONWEALTH Bank is set to reveal a greater-than-expected decline in margins in the wake of the global credit crunch, but should still turn in a net half-year profit of at least $2.4 billion this week.

As the first major bank to report its earnings figures since the liquidity crisis swept through corporate balance sheets, the CBA will underline a steeper fall in the money it earns on key parts of its lending business.

But the margin erosion and a keenly awaited statement on the bank's immediate prospects from chief executive Ralph Norris at Wednesday's results announcement will do little to blunt criticism of an anticipated 7% to 9% increase in interim profit following its controversial Reserve Bank-busting mortgage rate rise.

The bank's decision last week to raise its standard variable home loan rate by 30 basis points, instead of the 25 basis points pushed through by the RBA, prompted a barrage from Treasurer Wayne Swan and consumer groups angered by perceived profit-making on the backs of mortgage holders.

Facing higher funding costs of their own because of an increase in borrowing costs on wholesale financial markets, all the banks have sought to recoup some of these expenses by lifting mortgage rates above the level set by the RBA.

The five leading banks - Commonwealth, ANZ, National Australia Bank, Westpac and St George - imposed an average 15 basis points or 0.15% increase in January in the first such move.

ANZ found itself in the public firing line last month when it pushed through a 0.2% rise.

The CBA escaped the main brunt of the criticism with an amount half that. However, having gambled and failed that its funding pressures would ease between early January and last week's RBA decision, the CBA found itself badly exposed in having to make up part of the financing difference just as mortgage rates hit 9% - the highest for a decade.

The bank's defence that it has swallowed the increased costs for the best part of five months - a period covering most of its latest half-year figures - is unlikely to win it many supporters outside financial markets, especially given the upward trend in overall profits.

Analysts are also anticipating that the country's largest retail bank will have suffered worse than others in terms of lower margins, given the unfortunate combination of two factors.

The first of those factors, according to ABN Amro, is that the CBA will be the first bank to report half-year results that cover the worse period of the credit crunch while its rivals will have two extra months before their May disclosure dates to make up some costs if the crisis begins to ease.

The second factor is that the mortgage rate increase in January has came too late to help reduce the impact on margins at the interim mark.

Nonetheless, the CBA will still have been able to increase its profit performance comfortably, largely because of companies switching their lending needs to the major banks.

There has also been strong demand for new credit, both from businesses and consumers, as the economy continues to grow.

ABN Amro is expecting a profit performance of $2.42 billion, up 7% on last year, while Macquarie Equities has pencilled a 9% rise to$2.48 billion.

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