REFILE-UPDATE 2-Australia's low-risk banks on track for sixth year of record profits

Wed Feb 12, 2014 2:40am EST

(Corrects to add dropped word in first paragraph)

* Commonwealth Bank H1 record interim profit up 14 pct to A$4.27 bln

* Banks benefiting from less exposure to bad debt

* Economic outlook cautiously positive

By Byron Kaye

SYDNEY, Feb 12 (Reuters) - Commonwealth Bank of Australia on Wednesday highlighted shrinking bad debt provisions as a key factor in record interim profits, the second of Australia's "Big Four" lenders to do so this week in a trend that augurs well for full-year earnings.

Market leader CBA's half-year results came a day after Australia and New Zealand Banking Group Ltd, the country's third-biggest lender, beat first-quarter forecasts and announced a surprise fall in projected bad loan provisions.

Both banks said significant declines in loan impairment costs contributed to their better-than-expected results, suggesting not just a renewed investor confidence that the country's four biggest lenders will notch up a sixth straight year of combined record profits in 2014, but also that they will keep turning corporate Australia's reluctance to borrow money into a positive.

"Everyone's been going on that there's no loan demand," said Shaw Stockbroking analyst David Spotswood, referring to companies' reluctance to take on more debt due to volatility in global markets despite record low interest rates.

"While that impacts revenue growth, that means there's less bad debt. This will definitely be a feature of Bendigo and NAB when they report, and it will be the same for the next six months and the next 12 months."

Bendigo and Adelaide Bank Ltd, the number-six lender, reports first-half results on Feb. 17 and National Australia Bank Ltd, the fourth-largest, reports first-quarter earnings on Feb. 21. Westpac Banking Corp, the second-biggest, reports half-yearly earnings in May.

CBA reported a record half-yearly cash profit of A$4.27 billion ($3.86 billion) on Wednesday, compared with A$3.75 billion the previous year. The previous interim result of A$3.78 billion was restated for continuity, CBA said.

The bank reported a 26 percent decline in loan impairment expense because of the "relatively benign corporate and commercial loan loss environment".

Debts have been easier than ever to pay off in Australia thanks to the central bank keeping official rates at or near historic lows. The Reserve Bank kept its main cash rate at a record low of 2.5 percent on Tuesday as expected, although it surprised some by dropping its bias towards easing policy.

This means banks need to set aside less of their earnings to cover potential losses from bad debts.

"It doesn't matter what metric you use, credit quality is improving," CBA chief financial officer David Craig said.

"Troubled assets are continuing their steady decline."

ANZ on Tuesday posted a A$1.73 billion profit for the three months to December, up from A$1.53 billion a year earlier. Its forecast that bad loan provisions should fall by about 10 percent in the year to September 2014 pleased investors, with its share price gaining two percent on Tuesday and outpacing the broader market.

CBA shares closed 0.37 percent higher on Wednesday at A$76.20, compared with a one percent gain on the broader market, as it said low interest rates had stoked competition and narrowed margins.

PLAYING IT SAFE

Putting aside the increasing likelihood of yet more unprecedented profits, lenders are pointing to tepid investment activity in Australia's non-mining sectors other than housing as reason to maintain their cautious approach to risk.

"Given the uncertain outlook for both the global and domestic economies, the group remains cautious, maintaining a strong balance sheet with high levels of capital and provisioning," CBA chief executive Ian Narev said.

ANZ chief executive Mike Smith on Tuesday said there were "a number of challenging issues in the global economic environment", although those had become "largely more predictable".

Since Smith joined ANZ in 2007 the bank has been trying to improve credit quality and stabilise its profit margin on interest rates, alongside its push to grow its business in the broader Asian region.

Another bank with a play-it-safe plan is Macquarie Group Ltd . Australia's top investment bank on Tuesday confirmed that its strategy of building up its safer annuities-style businesses - unlisted funds, retail banking and corporate asset leasing - had boosted earnings.

It said its full-year net profit was on track to exceed A$1 billion for the first time in four years.

The bank, whose business model once centred around buying big infrastructure assets and spinning them off into listed funds, said its "market facing" businesses were down in the third quarter compared with the previous year.

"Macquarie's push ... into global funds management has lowered that investment banking risk profile, which has been a very good outcome," Morningstar analyst David Ellis said.

"Banks are looking to de-risk and this is obviously a global trend." ($1 = 1.1072 Australian dollars) (Editing by Stephen Coates)