Commonwealth Bank reports record $7 billion full-year profits as its mortgage lending grows 4%

Australia’s biggest mortgage lender, the Commonwealth Bank, has reported record after-tax profits of $7.09 billion to June 30 – up 11% on the previous year – but slightly below analysts’ expectations in an environment of subdued credit growth and tighter interest margins.

The Commonwealth Bank retail banking division, which includes its mortgage lending business, managed cash profit growth of 3% to $2.9 billion over the year.

The bank’s share of mortgage lending in Australia fell slightly from 25.9% as of December 2011 to 25.7% as of June as it grew its home loan book by 4% ($15 billion) to $351 billion.

The bank noted that this outcome was the result of subdued system (industry-wide) growth and intense price competition.

Profits at subsidiary WA-based lender Bankwest increased by 13%.

The Commonwealth Bank reported that profit margins on lending and other products continue to be squeezed, with net interest margins (NIM) falling three basis points year-on-year. 

Delivering his first full-year results briefing since taking over as chief executive from Ralph Norris, Ian Narev called the 12-month performance a “good result given the uncertain environment in which we are operating”.

“As expected, revenue growth was subdued reflecting ongoing caution from both our retail and corporate customers.

“This translated into lower credit growth and greater pressure on market sensitive businesses."

Narev says the funding costs are being impacted by the higher interest rates the bank is paying on retail deposits in an intensely competitive environment as well as high wholesale costs when borrowing money on international markets in the wake of the debt crisis in the eurozone.

“Higher funding costs have put pressure on margins as competition for domestic deposits intensifies and wholesale funding continues to be expensive,” Narev says.

Despite these concerns, the bank remains positive about the medium- to long-term outlook for Australia.

“However, the global economy remains uncertain. It is difficult to see the catalyst for alleviating the uncertainty which will continue to affect consumer and corporate confidence. So, in the near term, we expect current revenue trends to continue, and we will retain conservative business settings,” says Narev.

The bank reported a 15% decline in loan impairment expense, with credit quality continuing to improve with troublesome and impaired assets down by 15%.

Loans 30 days in arrears decreased from 1.94% to 1.69% of the total portfolio, while those more than three months delinquent declined from 1.03% to 0.88%.

“While many of our customers are facing challenges, this is not translating into a deterioration of credit quality," says Narev.

 “However, given the uncertain outlook for both the global and domestic economies, we remain cautious with a strong balance sheet with high levels of capital, provisioning and liquidity,” he says.

The board declared a final dividend of $1.97 per share - an increase of 5% on the previous year’s final dividend. The total dividend for the year was $3.34 per share – up 4% on the previous year.