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Bank reaps jackpot profit

How can the Commonwealth Bank of Australia (CBA) post a record $7.8 billion full year profit, when consumer borrowing remains low? Business reporter Clancy Yeates explains the reasons behind the biggest ever profit by an Australian bank.

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The Commonwealth Bank has produced a set of numbers that would have been the envy of banks around the world. But it wasn’t enough to justify its '‘priced to perfection'’ share price.

It’s hard to understand how traders could have expected any more but the immediate reaction from the market was to push the share price more than 1 per cent lower. Since September its shares have risen more than 36 per cent thanks to demand from yield-hungry investors.

The cash earnings improvement of 10 per cent - described by one analyst as ’'a perfect 10'’ is better than the consensus had predicted and the final dividend of $2 was at the top end of the range and full year dividend was up 9 per cent. But some were hoping for more. 

Shareholders will be impressed at the CBA’s performance - and its ability to squeeze a 13 per cent improvement from its Australian retail operations.

Shareholders will be impressed at the CBA’s performance - and its ability to squeeze a 13 per cent improvement from its Australian retail operations. Photo: Brendan Esposito

Not everyone will be happy. Record earnings are generally followed by howls of protest from the bank borrowers who did not receive the full reserve bank interest rate cuts during the financial year.

The government has already devised a way to impose a deposits levy should it be returned to power in September.

But shareholders will be impressed at the CBA’s performance - and its ability to squeeze a 13 per cent improvement from its Australian retail operations in what is a sluggish credit market and a very competitive market for deposits.

Top line income grew by 8 per cent and costs declined by 3 per cent across the organisation.

The result also received a positive kicker from good gains from the New Zealand business and a better contribution from wealth management.

CBA didn’t manage to make any significant inroads in market share in most categories. In local home lending it inched up from 25.1 to 25.3 and in retail deposits grew 0.1 of a per cent where in the business lending market CBA lost 20 basis points of market share.

Chief executive Ian Narev while setting up his bank as the one for the competition to beat - has demonstrated there is still good returns to be had in the banking industry.

Shares in National Australia Bank, ANZ and Westpac all moved up in morning trading.

The CBA point of difference continues to be its long term investment in IT and the productivity gains and better scores in customer satisfaction. It is now ahead of the pack on the all important measure of products per customer.  

The profit improvement this generates allows CBA to continue to invest despite the fact that it is facing cost headwinds in 2014. It sets the scene to further push CBA’s momentum and continue to broaden the lead from some competitors - most notably ANZ and NAB.

It puts CBA in a strong position in the event the economic environment deteriorates - a possibility that the bank does not discount. Banks carry an economic overlay to buffer deterioration in impaired or no- performing loans. This remained in place despite a fairly benign experience in bad debts in 2013.