November 7, 2017 / 10:02 PM / a year ago

Australia's CBA beats expectations as margins improve

SYDNEY (Reuters) - Commonwealth Bank of Australia (CBA.AX) said on Wednesday first-quarter cash profit jumped 10 percent, topping analyst expectations, as impairment charges fell to a record low and higher mortgage rates widened its home-lending margins.

A pedestrian is reflected in the window of a branch of the Commonwealth Bank of Australia (CBA), Australia's biggest bank by market value, in Sydney, Australia, November 8, 2017. REUTERS/Steven Saphore

The result for Australia’s No. 1 lender caps a run of bank results which have included some of the lowest bad debt charges on record, but left concerns that lenders may not be fully prepared for a downturn in the property and retail sectors.

“The banks have done a great job with bad debts, with actual charges at record lows, but they’re not going to stay there. It’s fair for the banks to plan for an upswing,” said Matthew Ryland, portfolio manager at Greencape Capital which owns CBA shares.

CBA’s unaudited cash earnings were A$2.65 billion ($2.03 billion) for the three months ending Sept. 30, compared to the A$2.6 billion average estimate of four analysts polled by Reuters. Cash profit, a measure that excludes one-offs and non-cash accounting items, is closely watched by investors.

On a statutory basis, net profit rose 16.7 percent to A$2.80 billion. Net interest margin, a barometer of profitability, improved in the quarter, although CBA did not provide a number.

Bad debts fell to A$6.1 billion from A$6.8 billion a year ago, while bad loan charges edged down to A$198 million, or a record low of 11 basis points of gross loans.

CBA shares were up 1.6 percent in morning trade, the biggest gainer of the banks, while the broader market was down about 0.1 percent. The stock has recovered much of the ground it lost in the wake of a money-laundering scandal in recent months.

CBA did not provide an outlook in its limited update, but credit rating agency Fitch warned on Monday that earnings at Australia’s biggest banks would come under pressure because of slowing revenue growth and higher impairment charges.

The so-called Big Four banks have raised rates on interest-only and investment home loans in response to regulators’ concerns about home-price bubbles in Sydney and Melbourne, Australia’s two biggest cities.

CBA’s three closest rivals - Australia and New Zealand Banking Group Ltd (ANZ.AX), National Australia Bank Ltd (NAB.AX) and Westpac Banking Corp (WBC.AX) - have reported higher full-year profit to September in the past two weeks.

But while profits continue to grow, the banks have cited pressures including fierce competition, higher capital requirements and a new bank tax. All four are selling non-core and riskier businesses to boost capital.

CBA’s common equity Tier-1 capital ratio at the end of September rose to 10.1 percent from 9.4 percent a year ago, below the regulator’s target of at least 10.5 percent.

CBA’s full-year reporting period is to the end of June.

Reporting by Paulina Duran in Sydney; Additional reporting by Rushil Dutta in Bengaluru; Editing by Stephen Coates

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