Investors Wanted Reassurance, But Got Uncertainty

Sydney Morning Herald

Thursday February 14, 2008

Danny John

AN understandable desire by the chief executive of the Commonwealth Bank, Ralph Norris, to play up his organisation's inherent caution by pricing risk into every lending decision ironically proved to be its undoing yesterday.

The rapid unwinding of a carefully worded results statement - which sought to balance out the bank's ability to ride out the effects of the global credit crunch with the inevitable controversy of increasing profits at the expense of home loan borrowers - did him and his rivals little good in the end.

Their only comfort was that Commonwealth had the misfortune of reporting its first half figures a couple of months before them. It was always going to be a difficult balancing act.

In trying to avoid a repeat of last week's political fall-out by announcing a subdued profit result, the bank spooked investors who wanted reassurance, not the uncertainty which it inadvertently delivered.

What got lost amid the crashing sector share prices was that the bank's underlying profit compared to a year ago was 9 per cent ahead - bang on where analysts had been forecasting.

It was only the impact of financing the cost of the money the bank itself borrows, and a wish to ensure it is not overly exposed to a corporate failure, that held back the overall percentage rise.

But the result was 11 per cent up on the most recent half year - an indication that despite rising interest rates, domestic demand is still stoking growth across the bank's business.

Retail banking was ahead by 8 per cent while wealth management soared by 27 per cent, all of which helped support claims of gains in market share. Not only did retail deposits and home loans continue to grow strongly (in the latter case by 14 per cent even with the rate rises), arrears across the domestic lending portfolio - mortgages, credit cards and personal loans - actually fell during the half.

These were all indicators that should have given comfort to the market, as well as underpinning Mr Norris's comments that, despite the continuing wholesale funding problems and the twin prospect of higher inflation and another rise in interest rates, the Australian economy remains in good shape.

According to the Commonwealth, credit growth will continue to grow at its current healthy rate for the rest of this calendar year, with the business sector taking over where households and consumers previously led.

But instead of looking forward to earnings growth at the same level or even higher than its peers (and so driving full-year cash profits close to $5 billion), the bank has significantly increased worries that the credit cycle has finally turned down, taking with it the banking industry's immediate prospects.

Those doubts were best expressed by Deutsche Bank's take: "Commonwealth is either hoping for a material change in its fortunes in the second half or it thinks the market's earnings estimates for the rest of the sector are too high."

Quite.