(Corrects to add dropped word in first paragraph)
* Commonwealth Bank H1 record interim profit up 14 pct to
* Banks benefiting from less exposure to bad debt
* Economic outlook cautiously positive
By Byron Kaye
SYDNEY, Feb 12 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
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
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
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
($1 = 1.1072 Australian dollars)
(Editing by Stephen Coates)