REFILE-UPDATE 2-Australia's CBA banks on basics for record profit

Wed Feb 13, 2013 2:44am EST

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* Retail lender is world's 10th biggest bank by market cap

* Boosts H2 cash profit by 6 pct to record A$3.78 bln

* Increases H2 dividend by 20 percent to A$1.64

* One in two Australians bank with CBA

By Jane Wardell

SYDNEY, Feb 13 (Reuters) - If boring is beautiful, Commonwealth Bank of Australia is a master of the adage.

The Australian retail bank, which writes one in four of the country's mortgages, reported a record half-year profit on Wednesday, pushing its shares to an all-time high and proving that basic banking is enough to win a place in the big league.

CBA has slowly crept up the world rankings by eschewing investment banking to keep its business solidly based on plain vanilla retail and commercial operations.

With a market capitalisation of A$108 billion, CBA is now the world's tenth biggest bank by market value, according to the Thomson Reuters Global Banks Index. That's about equal to the value of Britain's Barclays Plc and Germany's Deutsche Bank AG combined.

"The difference between the Australian banks and others, mainly European banks, is that they haven't branched out of retail and commercial banking," said Evan Lucas, a Melbourne-based market strategist at IG Markets.

Analysts expect CBA's results to be reflected across the sector when Australia's other main banks report later this year.

CBA largely avoided riskier areas such as mortgage-backed securities or European bond markets, and lent to householders in an economy that sailed through the recent financial crisis with the support of a China-backed mining boom.

"They didn't end up having a situation where margins were really squeezed on the one side and the books were fairly heavy on the other side," Lucas said.

CBA's 6 percent rise in second-half cash profit to a record A$3.78 billion was underpinned by growth in its retail bank business and improvements in global markets that boosted wealth management earnings.

One in two Australians bank in some way with CBA, a huge asset in a country where household net worth rose by 10 percent last year, according to Reserve Bank of Australia estimates.

The strong result propelled the bank's shares to an all-time high of A$67.38 and also lifted the three other banks that round out Australia's "Big Four" -- Westpac Banking Group, National Australia Bank and Australia and New Zealand Banking Corp.

The bank's shares have risen 34 percent over the past year, well ahead of an 18 percent gain in the benchmark S&P/ASX 200 index.

PLAYING IT SAFE

Australian banks have played it safe for several years, sticking to the basics as international peers moved into investment banking and risky instruments such as CDOs.

They have been extremely cautious about making acquisitions despite their cash piles.

CBA Chief Executive Ian Narev dismissed suggestions on Wednesday that the bank would use its highly valued stock to make a rash of purchases.

"The bar that we put for successful M&A is very high," Narev told an analyst briefing.

"And what we've seen here again is that by sticking to the knitting we can still continue to do a pretty good job for our shareholders."

CBA's return on equity ratio has averaged 16.5 over the past 10 years, according to Thomson Reuters data, and is currently at just over 18 percent.

In contrast, at Swiss bank UBS, return on equity sank to a negative 61.78 at the height of the financial crisis in 2008, recovering to just 8.25 percent last year. Japan's MUFJ has averaged 5.4 percent and Citigroup 5.7 percent over the past 10 years.

Only the Canadian banks, where a long run-up in the housing market has helped credit growth, compare to their Australian counterparts.

CBA rewarded existing investors by boosting its interim dividend by 20 percent to A$1.64, although it cautioned that its final dividend was likely to be slightly lower than a year ago.

But anyone hoping to catch a bargain may have missed out. CBA's price to book ratio - where a low number may signal a good deal - is the highest among the global top 10 banks at 2.57. In contrast, Industrial and Commercial Bank of China, the No. 1 by market value, is the nearest at 1.61. ($1 = 0.9700 Australian dollars) (Editing by Richard Pullin)

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