Greetings, reader. This weekend’s topic? Commonwealth Bank (ASX:CBA) and its annual results. We’ve stripped them down though. They’re not dressed up here like in the report itself. All those bothersome words and fancy graphs are gone. Here are the bare facts.
The headline numbers sounded decent. Revenues were up by 12%. Net profit was up 7%. The final dividend will be $1.53, taking the total annual dividend to $2.66 (a yield of over 6% at today’s price).
Of course, Commonwealth Bank was one of the banks bleating about the cost of credit and the squeeze on its interest margins. After all, isn’t that what forced it to increase lending interest rates independent of the Reserve Bank of Australia?
We aren’t in the habit of telling anyone how to run a business…least of all a $58 billion bank. We’ll leave that to politicians, welfare groups and the mainstream press as they all deem themselves suitably qualified. We prefer to let them tell us and then we can decide whether to believe them or not.
Instead, here, we’ll restrict ourselves to just observing.
In the 2008 Profit Announcement document there were eleven separate mentions of higher “funding costs”. This compared with no use of that phrase in the 2007 profit announcement. Yet the net interest margin (NIM) for the 2007 financial year falling by 0.15% compared with a 0.1% fall in 2008.
So the margins have fallen both year…but only now is Commonwealth looking for a bigger handout from customers. All the four big banks have added an extra 0.5% to mortgage rates over and above the RBA’s official rate adjustments.
Yet margins are contracting. Despite the margin contraction, though, the bank still saw its net interest income increase in dollar terms. It rose by 12%. That was partly due to an increase in business lending of 22%. But its domestic deposit volume also increased by 23%.
And consider this, reader…CBA has the largest volume of retail accounts, many of which would be high margin transactional accounts. In other words, CBA pays next to no interest to customers for these deposits.
Honestly… of the four major banks, CBA probably has the least to worry about with its funding costs.
But the bank is making more loans for less money per loan. How long can it keep that up? We’re not sure.
As Al said yesterday…the crystal ball is rather cloudy in some sectors.
However, we do know one thing. Providing the banking system in general is able to weather the storm of increased funding costs, CBA would probably do well to not lay it on too thick with the “woe is us” act. Otherwise customers might be well justified in asking for some of their money back when (or if) the good times eventually return.
This Week’s Most Important Money Morning Story:
Earlier this week, the Reserve Bank of Australia told the world…wait for it…nothing new at all! But in true central banking fashion, it took 25,254 words to say so. We calculated: that’s the equivalent of one month’s worth of weekly Money Mornings (I know which I prefer to read). Fortunately Al was a little more succinct. Click here for the full story >>
Monday: Onesteel announced a 61% increase in half-year operating cash- flow earlier this year. It puts that down to the expanding business. Until steel makers are really starting to hurt, iron ore’s a buy. That’s not the case yet. Click here for the full story >>
Tuesday: It jumped from $1.77 to $2.25 in one week during 2007. And it kept rallying until recently. FMG’s year-high was $13.15 on June 25 this year. Basically, the stock rose by 643% in 15 months. Click here for the full story >>
Wednesday: It’s a little too early to be talking about stock market bottoms. But here’s our view…the best time to compare our own period with is the last real recession. Back in the early 1990s. Not the Tech Wreck. Click here for the full story >>
Thursday: As far as the bear market in equities goes, investors are certainly down on confidence. But they aren’t motivated by sheer terror just yet. That makes us think the market has more selling left in the tank. And more days like yesterday to come. Click here for the full story >>
Friday: This small-cap digger has discovered the third largest mine of its kind in the world. Not only that…but the mine just got bigger too. This company, though unpopular now, announced a huge new reserve figure last month. The ASX wasn’t ready for it. The stock added 25% in five days. It’s cutting a swathe through the gloomy market.
