Commonwealth Bank of Australia, the country’s largest home lender, says it is unable to guarantee matching any further reduction in official interest rates.

Financial markets are fully pricing a further quarter of a percentage point reduction in the Reserve Bank of Australia’s (RBA’s) cash rate when its board meets next month.

“We can’t be in a position to make any comment,” Commonwealth Bank of Australia’s James Sheffield told a parliamentary hearing in Canberra.

“The volatility in the market is huge at the moment,” he told parliament’s house economics committee which is conducting and inquiry of competition in the banking and non-banking sectors.

“You have got to wait for the theoreticals to become real and make a decision, balance out the interests of our customers, obviously pass on as much to our customers as we can afford, but you must also bear in mind we are on very turbulent waters at the moment.”

Retail banks did match the RBA’s rate cut earlier this month, the first reduction by the central bank in nearly seven years.

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.

The market is up 8. An unremarkable day. Financials down 0.7% after a dull performance overnight in the US. Resources up 0.2% after a strong lead from BHP, RIO and energy stocks in the US. Metal prices up. The SFE Futures were up 15 this morning.

Dow up 40. Up 69 at best. Down 95 at worst. Main Point: Financials down 1% on Freddie Mac and AIG’s ugly results and Morgan Stanley freezing home-loans. Energy and resources outperformed on good results. 6 out of 10 sectors up – indexes at 6-week highs. Dow encouragingly turned around a 0.7% loss to make a 0.3% gain holding onto the 331 or 3% gain yesterday. Large cap techs offset bad news in the financials. Nasdaq up 1.2% on better-than-expected results from Cisco. Oil price down 5.4% for the week already. Resources up 1% with BHP and RIO up strongly – up 4.36% and 4.72%. Energy outperformed – up 1.9% on better-than-expected results from Devon Energy. Refiners up with Tesoro and Valero up 12% and 7%. Sunoco up 3.3%. Freeport-McMoRan up 11%. Morgan Stanley froze the home-equity lines of credit for thousands of clients while their homes dropped in value. Telecoms down 1.4% - underperformed – Sprint Nextel and Qwest both reported a lost subscribers. USD climbed to 8-week high against the euro and 7-month highs against the yen – the global slowdown and less fears of inflation are helping the USD to rise.

• Both BHP and RIO up in ADR form overnight, 4.36% and 4.72% respectively. BHP down 6c to 3716c. RIO up 110c to 11550c.
• Metals mostly up overnight – Nickel up 1.17%, Zinc up 1.1% and Lead 2.53%. Aluminium up 0.21%. Oz Minerals up 2c to 176c.
• Oil price down 14c to $118.57 after the U.S. Energy Department’s EIA said crude inventories increased by 1.7m barrels to 296.9m for the week ended Aug. 1, slightly more than the 1.2m-barrel increase expected. Woodside up 77c to 5149c.
• Gold down $3 to $878.80. Newcrest down 40c to 2500c.
• US Bonds down with the 10 year yield up to 4.05% from 4.02%.

Nickel and copper stocks mostly upon a small bounce in metal prices (although copper futures dropping intraday). KZL up 2%, JML up 4,4%, WSA up 0.4% and PAN up 3.5%. Banks down again, NAB down 2.1% and CBA down 0.8%. Big industrials up with a sentiment change towards the consumer discretionaries after the RBA flip flopped their bias towards rate cuts on Tuesday. WOW up 1.5%, WDC up 1.5% and WES up 1.2%.

Unemployment numbers are out at 4.3% - steady on last month – new jobs strong. A$ jumped on the numbers. The European Central Bank makes an interest rate decision tonight. Expected to remain hawkish on rates and leave them where they are. Dow Jones Futures down a worrying 47 at the moment. Enough to keep you out of an overnight trade.

Company news

• Tabcorp (TAH) up 6% early on results - booked a hefty loss but underlying results in-line and there was some relief they were not worse. Market happy with solid underlying earnings and dividend being kept.
• Connecteast (CEU) down 16% early on “disappointing” first week of tolling falling to half the rate of toll-free period - UBS also downgraded the stock.
• Minara Resources’ (MRE) weak 1H report shows net profit down 80% on-year with no interim dividend – below consensus. Our analyst thought they’d fall over…but only down 2.7%.
• Fortescue (FMG) signs a rail and port agreement with Atlas Iron to give AGO access to their rail and Herb Elliot Port – Atlas Iron (AGO) up 14% early on the announcement.
• West Australia Newspapers (WAN) downgraded by brokers on poor FY08 results yesterday and cautious FY09 outlook – seen as a warning to all media companies….but up 4.13%.
• News Corp (NWS) kept mostly at a BUY by brokers after they posted results and positive guidance yesterday. A falling A$ helps. Down 3.11% or 52c to 1621c.
• ResMed (RMD) had its target price boosted by Credit Suisse after results yesterday showing positive top-line revenue growth. Up another 3% today.
• UBS has downgraded the Infrastructure sector after reviewing their cost of equity assumptions.
• Merrills says CBA’s crucial results on the 13^th are unlikely to surprise due to fairly good transparency around solid volume growth, improved margins and bad & doubtful debts at 23bps of total loans. Says CBA is under-provisioned yet has limited exposure to single-names. Down 25c to 4360c.
• Merrills expecting Telstra’s August 18^th FY08 result to be “very strong” with net profit up 14.4% and management’s long-term guidance to be upgraded. TLS up 4c to 453c.
• St George Bank has a briefing next Tuesday. SGB up 13c to 2898c.
• Corporate Express (CXP) downgraded by brokers post yesterday’s results showing falling customer sales and deteriorating market. Down 2%.