Spooked Investors Dump Banks

COMMONWEALTH BANK has fuelled fears the global credit contagion has brought the banking industry's stellar run of large profit increases to a halt, with a warning that it sees little chance of an easing of the funding crisis before the end of this year.

A disappointing 4 per cent increase in first-half net cash profits to $2.385 billion came in well below analysts' expectations, triggering a wave of selling that led to the biggest one-day rout in bank share prices in 19 years.

CommBank's disclosure that higher funding costs had cost it $100 million at pretax level, and its need to increase provisions by $138 million to cover the possibility of corporate debts going bad, led to nearly $5 billion being wiped off its $65 billion market value. Its shares closed $3.20 down at $46.20 - a fall of nearly 6.5 per cent - and brought down the rest of its rivals.

Similar percentage falls slashed $1.50 from ANZ which ended the day at $23.80, while National Australia Bank lost $1.80 to $30.40 and Westpac 99c to $23.25.

The biggest damage was to St George, whose funding needs are more exposed to worldwide finance markets. Its shares declined a massive 6.8 per cent - $1.88 - to $25.52.

Commonwealth's result prompted fears that the other major banks will suffer similar reverses when they report their earnings in two months' time. Analysts at Deutsche Bank said the trends did not "bode well" for the rest of the sector.

Chief executive Ralph Norris described the profit result as "solid" and said it reflected the difficult trading conditions all banks had experienced since the credit crunch started last August.

Bank profits have experienced high double digit growth over the past few years supported by strong economic expansion. These increases were expected to slow this year as the economy turned down but were still expected to come at around 9 and 10 per cent.

But while the bank's major divisions - in particular retail banking and wealth management - delivered better performances than last time, it was the blanket effect of the rise in wholesale funding costs and higher provisions that dampened the overall increase. As a result, earnings per share rose just 2 per cent to $1.80 while the interim dividend was up 6 per cent to $1.13 a share.

Commonwealth's own increased cost of borrowing also underlined the difficulties it has experienced with dealing with higher mortgage rates. Last week it was castigated by critics for raising its standard variable home loan by 30 basis points - 5 points above the Reserve Bank's lift in the official rate on February 5.

Commonwealth's higher-than-expected increase was designed to reverse a mistake made in January when its home loans went up by the lowest amount - 0.1 percentage points - of all the rival banks, as the industry attempted to recover its rising costs. "We made a mistake," Mr Norris said yesterday, indicating the bank had come to the wrong conclusion that global financing pressures had started to ease last month.

The volatility in markets was now expected to continue for the rest of this year - a judgment that will provide little relief for home loan borrowers after Mr Norris refused to rule out more interest rate rises independent of the Reserve Bank if its cost pressures blow out again.

Danny John Analysis - Page 32