By James Frost
Commonwealth Bank of Australia is preparing to attack rivals for a bigger share of the spoils from business banking after delivering one of the standout results of the reporting season and further entrenching its dominance of retail banking in Australia.
CBA chief executive Matt Comyn delivered a bullish outlook for the bank and the economy on Wednesday when he revealed it had extended its lead on its rivals with strong gains in the key product areas of mortgages, deposits and business accounts.
Two weeks after Mr Comyn said the bank was ready to draw a line under the Hayne royal commission and move on CBA has delivered loyal shareholders a $4.47 billion first half cash profit, a $2 interim dividend and a 4 per cent rally in the share price.
“We’ve seen an improvement, certainly, in the housing market. We’ve seen recent unemployment figures which have been very strong, in NSW some of the lowest unemployment rates since the 1970s,” Mr Comyn said.
“Strong operational performance has underpinned a very solid result. Our home lending was up 4 per cent, business lending up 3 per cent over the period, and a very strong deposit result, up 9 per cent,” Mr Comyn said.
Close to 36 per cent of Australians count CBA as their main financial institution. It has 24.9 per cent of the home loan market and 26.8 per cent of the deposit market.
Cash profit for the first half of 2019-20 fell 4.3 per cent, much lower than was expected, to $4.47 billion in a surprise result which prompted one analyst to say it “shot the lights out”.
Mr Comyn was confident about the economic outlook citing the government’s strong fiscal position, infrastructure investment, lower unemployment and a recovering property market.
He said the bank planned to use improving conditions and the strength of its business to capture even more younger customers and business owners.
“We’d like to invest in the business banking market in particular,” he said, announcing plans to launch a fee-free business transaction account.
“We have seen a continued and strong uptick with younger customers who are using us as their primary financial institution … that’s a result of our investment in digital.”
“That’s part of our best everyday banking proposition and our promise to make business banking easier and so a number of those segments are a real priority for us.”
Plans to target business customers is likely to rankle NAB, Australia’s biggest business bank, while the traction with younger customers will tread on the toes of ANZ which has made considerable investments in technology.
Almost two thirds of transactions conducted by CBA are performed online via Netbank or its CommBank mobile app.
WAM Leaders portfolio manager Matthew Haupt holds $53 million worth of CBA shares and said the result exceeded expectations on almost every metric.
“It’s a resilient result in a tough operating environment. CBA has a strong capital position and the volume growth will offset well flagged headwinds for the moment,” Mr Haupt said.
Mr Comyn played down fears about the impact of the bushfires and the coronavirus, saying they would undoubtedly weigh on growth but the quantum of the impact would be unable to be measured for some time.
The bank was unperturbed by lending bottlenecks cited by other banks making an additional $53 billion in loans to home buyers and an additional $19 billion in loans to businesses.
The strength from mortgages contrasts with rival banks which have lost market share as they have updated and integrated back office systems and grappled with responsible lending obligations.
“We’ve just been very consistent around operations and execution time,” Mr Comyn said. “Brokers will move to institutions where they can get an answer in 48 hours or slightly longer than that.”
The 4 per cent growth in the bank’s mortgage book is around 1.5 times mortgage system growth. Mr Comyn agreed it was unusual and said the bank hadn’t experienced figures like it since the GFC.
“It surprised us,” Mr Comyn said. “I feel like we’ve had a good start to the year but I wouldn’t expect our performance to persist at these levels.”
The bank also shocked with an increase in the net interest margin – a measure of profitability that shows the difference between what money costs the bank and what it charges to lend it out – by one basis point to 2.11 per cent against expectations for a fall of between one or two basis points.
Bell Potter analyst TS Lim said the bank had “shot the lights out” after beating both his numbers and broader consensus estimates.
“This is a bank that has gone back to basics and is investing in innovation, it’s investing in IT and it’s miles ahead of the other banks,” Mr Lim said.
The responsible lending obligations which some banks claimed had led to a paralysis in approvals had not afflicted CBA according to Mr Comyn who said ASIC had been very accommodative.
“We are very comfortable with the lending guidance that’s come through from ASIC, we’ve been through that with detail and we are confident with our systems,” Mr Comyn said.
Banks have been struggling to meet investor expectations as they are buffeted by low interest rates, continued customer remediation costs and intense regulatory scrutiny.
Stephen Bruce manages Perennial Value’s large caps capability and has a generally positive view of the sector over the medium term. He said the result underscored the value of the franchise and their ability to deliver when free from distractions such as regulatory issues and succession.
“While the banks, as a group, face many challenges, the reality is that their core businesses are strong and it is up to them to defend their positions against emerging threats by effectively investing in better systems to improve customer experience and at the same time lower their costs.”
CBA offered up clues to the strength of its position during its first quarter update in November last year when it cited the strong home loan growth when the other banks were bemoaning the lack of clarity around obligations.
The bank also declared an additional $30 million in customer compensation charges but announced it had repaid customers $630 million as of December 31. The bank has made $2.2 billion in provisions for remediation since 2017.