Oz’s Commonwealth Bank posts US$7.8 billion profit

Sydney / AFP

Australia’s biggest lender Commonwealth Bank sounded a cautious note about the country’s economic outlook on Wednesday even as it posted a record Aus$9.23 billion (US$7.08 billion) in annual profit.
The Commonwealth Bank’s performance is closely watched for guidance on the health of the Australian economy in the current low interest-rate environment.
CBA chief executive Ian Narev said the company remained positive about Australia’s economic prospects but warned that the nation’s nominal growth, which is not adjusted for inflation, needed to strengthen.
Reflecting softness on the income side of the economy, Australia’s nominal GDP grew by 0.5 percent in January-March for an annual reading of 2.1 percent. It was far below real GDP of 1.1 percent in the quarter for a year-on-year figure of 3.1 percent.
“Income growth inside and outside Australia remains weak, so people are not feeling better off,” Narev said in a statement.
“When combined with ongoing global economic and political uncertainty, this makes households and businesses cautious, and hesitant to respond to monetary stimulus.”
Cash profit, the bank’s preferred measure of earnings that strips out one-off costs, rose three percent to Aus$9.45 billion for the year to June 30 compared to the previous 12 months, broadly matching analyst expectations. Net profit was up two percent at Aus$9.23 billion while cash earnings for the six months to June 30 slipped three percent compared to the July-December period.
Earnings from its retail banking division — the largest in the bank — rose 11 percent to Aus$4.44 billion, while business and private banking grew by five percent for the period.
But CBA’s bad debts jumped 27 percent, weighing on profits, on higher provisions for resource, commodity and dairy exposures.
The bank announced a final dividend of Aus$2.22 per share, leaving the final payout to shareholders at Aus$4.20, which was unchanged from the previous year.
Shares in CBA closed 1.29 percent lower at Aus$77.40.

‘Strong, solid result’
“It’s a strong, solid result, but there’s not a lot in this result that would want to make me buy this company on open,” IG Markets’ strategist Chris Weston said.
“The outlook that we’ve seen is fairly benign, there’s downside risks to Australian economics and Ian Narev said there’s going to be more of the same coming through.”
Australia’s economy is charting a rocky path away from mining-dependent growth, with the central Reserve Bank of Australia last week cutting interest rates to a record low of 1.5 percent to boost non-resources sectors.
Banks’ profits have been under pressure in recent months amid uncertainties in financial markets and the economy, and over fears of rising bad loans. Financial institutions are also having to deal with tougher regulations to dampen the housing market amid concerns the sector could overheat.
CBA said its common equity Tier 1 ratio — a measure of the capital it has available to absorb losses — rose 10.6 percent compared to 9.1 percent in the prior year. The bank last year announced a plan to raise Aus$5 billion to meet the capital buffer requirements, which are part of a global effort to make the financial sector more resilient to shocks.
Canberra has also stepped up pressure on the nation’s big four banks — CBA, ANZ, National Australia Bank and Westpac — to explain why they did not fully cut their home-loan rates when the central bank slashed the cash rate last week.
Prime Minister Malcolm Turnbull has announced that the four large lenders — among the developed world’s most profitable — will have to face a parliamentary committee for an annual grilling to explain their actions.

Central banks can’t just dial up growth

Sydney / AFP

Central bankers can’t just “dial up growth” to stimulate economies, outgoing Reserve Bank of Australia governor Glenn Stevens said on Wednesday, expressing serious reservations about the world’s reliance on monetary policy.
Central banks, particularly in developed nations, enacted unprecedented monetary easing policies after the global economic crisis to kickstart growth — including pumping huge amounts of liquidity into markets, cutting interest rates to ultra-low levels and buying up assets.
But the path towards recovery has been uneven. Amid fears that zero or negative interest rates and quantitative easing are becoming ineffective, central banks have started to consider other measures including so-called “helicopter money” where they funnel cash directly into economies.
“We can’t just assume that monetary policy can simply dial up the growth we need. We need some realism here,” Stevens said in Sydney in his last speech before he steps down as Reserve Bank of Australia (RBA) governor next month.
“I have serious reservations about the extent of reliance on monetary policy around the world.”
Stevens said although low interest rates were meant to encourage households and other private entities to take on more debt and spend more, some were already struggling with indebtedness.
Instead, governments should increase their borrowing and invest in “long-lived assets that yield an economic return” to generate demand.
“It isn’t that the central banks were wrong to do what they could, it is that what they could do was not enough, and never could be enough, fully to restore demand after a period of recession associated with a very substantial debt build-up,” Stevens added.
The Organisation for Economic Cooperation and Development in June cut its forecast for global growth to 3.0 percent from the previous 3.6 percent, and called on governments to boost spending or risk being caught in a low-growth trap.
Stevens said a return to previous interest rate levels around the world was likely to take some time.
“Through a combination of extraordinary circumstances, the central banking community globally has found itself doing unprecedented things,” the 58-year-old said.
“The ‘return to normal’ at the global level looks like being a very, very slow process. And normal is a different place now.”
Stevens, who is handing over to deputy governor Philip Lowe next month after a decade in the hot seat, has been praised for his steady hand as he guided the country through an unprecedented mining investment boom as well as the global financial crisis.
Australia for a quarter of a century has avoided falling into recession. But as the economy transitions from dependence on mining-driven growth, the RBA has had to cut interest rates to record lows to drive growth in non-resources industries.
The most recent easing to 1.50 percent was in early August.