CBA Marked Down On Hazy Outlook

Sydney, Aug 14, 2008 (ABN Newswire) - The Commonwealth Bank took a bit of a pounding from nervous investors yesterday, despite a solid full year result that saw earnings and the dividend lifted, despite the atrocious conditions in the last half.

Even if the second half figures were a bit slower and lower than forecast by the market, it was still a good effort given the volatility in financial markets and the concerns of sharemarket investors large and small.

The CBA reported a 7% increase in its annual net profits to almost $4.8 billion, and a 5% rise in its cash profit (which the banks and analysts use as a means of comparison) to $4.73 billion.

While the rise was not as high as last year's initial optimistic predictions, it was a profit rise, not a fall, as the ANZ and the NAB will report later in the year.

As the Commonwealth Bank has lifted profit 7%, St George says it's on track for a full year result of around 8% to 9% profit growth, its would-be merger partner, Westpac, sees its profit heading in the same direction and the merged Bendigo and Adelaide Bank had a solid 2008 12% profit rise, perhaps Australian investors will admit that they have been wrong about our banks for most of this year.

The valuations of the banks now imply investors think this economy will have a fully fledged slowdown, a recession. 

If that was to happen, export volumes and prices would have to fall because demand overseas had slumped. China's economy would have to be experiencing a sharp slowdown in growth; global growth would have to be approaching 1%.

If that was to happen, then all share prices would be sold off, not just the banks.

The cash profit performance gave a far better picture of the full year performance: it was up $100 million on the record result in 2007.

The final dividend was set $1.53, slightly up on the corresponding period a year ago, which takes the final to $2.66 - up ten cents or 4%. Last year the rise was 14%. So it was pulling in the belt all round.

But the half-hearted thumbs down for the CBA-which saw the shares off 2% and a bit more at stages- was probably because of the renewed fears on Wall Street about the health of banks after UBS ($US6 billion) and JP Morgan ($US1.5 billion) revealed new and surprising write-downs in the value of credit derivatives and other assets in the books. 

CBA shares fell to a low of $43.31 before bouncing to finish down 1%, or 46c, at $44.05.

But if you are looking for a reason why the market thought it was a bit of a damp squib, look at what the bank had to say about 2009.

It makes uncomfortable reading when you analyse it. Put briefly, the CBA is not all that confident of the next 12 months about anything.

Up to an update in May, the CBA had always included the following line as the concluding sentence in its outlook statements and earnings guidance:

"While it is difficult to forecast peer performance because of market volatility and its varying impacts, the Group believes that it should continue to deliver EPS growth which meets or exceeds the average of its peers."

Its absence from the May update, when it was in the outlook given with the interim profit in February, was the first sign from the bank and its management of their uncertainty in the immediate future as a result of the credit crunch.

Now that lack of certainty is there for all to see in the somewhat wordy, but revealing outlook statement given yesterday.

"The headwinds which the Australian banking industry experienced in the 2008 financial year are expected to dominate the outlook for global banking for some time.

"Uncertainty and volatility in global credit markets will continue to place upward pressure on funding costs.

"Commenting on the outlook Chief Executive Officer, Ralph Norris said: "While the domestic economy remains reasonably resilient, credit growth is expected to moderate as this slowing in the economy impacts our customers. 

While these broad trends are clearly evident, the duration and extent of the slowdown is more difficult to predict.

"There are clearly a number of negatives at work in the Australian economy but it is important that we recognise there are potentially a number of positive influences.

"These include the huge income boost from rising commodity prices; respectable growth in the economies of our major Asian trading partners; tax cuts; positive demographic trends; and robust business and infrastructure spending.

"The balance of these opposing forces favours continued modest economic growth with credit growth not too far below the average of the past decade.

"We are cautious going into the new financial year and the Group will continue with its conservative stance until signs of improvements in economic conditions are evident.

"The Group's capital position is strong with capital levels well above target ranges. A prudent approach has been taken to the management of credit and market risk and we are well provisioned given the current economic outlook. The Group is well funded, very liquid and in a strong position relative to global and domestic peers.

"While it is clearly a time to be cautious, the current environment presents well managed banks, like the Commonwealth Bank of Australia, with opportunities to grow even stronger.

"Our robust financial position has enabled us to maintain the momentum behind our five strategic priorities and we remain committed to further strengthening our core businesses should attractive, "on strategy", investment opportunities arise."

That's bank-speak for 2009 is going to be tougher than 2008 was, at the moment.

There will be pressure on funding costs (that's the mantra when the RBA starts rate cutting next month); the outlook is for credit growth is to ''moderate'' further in both business and consumer banking and costs are rising (9% was the figure for the year, but much of that is the higher funding costs).

The second half profit of $2.4 billion was only 1% higher than the previous half and got there because of a drop in tax in the six months.

So what the bank is saying in its outlook is: the credit crunch has made the global banking environment more difficult, while slowing credit growth and domestic demand for loans will make the domestic banking environment that much tougher as well, with loan growth predicted to be slower than the average for the past decade, it's going to be a tough 12 months.

So it's no wonder the bank once again couldn't say it will "continue to deliver EPS growth which meets or exceeds the average of its peers".

But while the profit was struck on a 10% increase in revenue to $14.3 billion, cash earnings per share were more subdued, rising by just 3% to 356.9c per share, and then there was its bad debts provision, which was a bit more conservative than the NAB and ANZ, even though the CBA is exposed to some of the big ones: Centro, Allco, City Pacific, MFS and ABC Learning. It was also banker to Commander Communications which shut up shop last Friday.

All these companies are in some sort of work out/asset sale/debt reduction. There is talk one or more banks are dribbling money into the near failed groups to keep the loans performing and some interest flowing. That keeps the big hits to provisions and the profit and loss account away.

Now the bank, and its 'peers' will have to cope with a slowing economy in the next year, but with the cost of money coming down as well, and some of the pressures off customers because of easing petrol costs.

Looking at that mixture, yesterday's treatment of the CBA by the market wasn't so odd after all.


 

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