commbank's dividend warning

Danny John
February 11, 2009 - 8:30AM
The extent of the problems caused by soaring bad debts to the banking sector was revealed today with the Commonwealth Bank disclosing a 16% fall in its first half results to just over $2 billion.

In recent trade, Commonwealth Bank's were down 32 cents, or 1.1%, at $29.28 - while the broader S&P/ASX 200 index was down 1.8%.


Whilst the Commonwealth sought to offset the gloomy news on its results by declaring a statutory after-tax profit figure of $2.57 billion - a 9% rise totally attributable a $547 million gain after buying BankWest late last year - the bank actually saw earnings fall away following a huge rise in impairment charges. The bank declared an interim dividend of $1.13 per share.


These rose by $1.27 billion to $1.6 billion as Commbank took a huge hit on its exposures to failed corporates such as ABC Learning and Allco Finance Group and the ailing Babcock & Brown asset management combine.

As a consequence cash profits - the industry's preferred measure of earnings - dropped from $2.38 billion in the corresponding six months to December 31 2007 to $2.013 billion in the first half just ended.

On an underlying basis, earnings slipped by 9% to $2.145 billion.

But there was some relief for the bank's shareholders who may have worried about a cut in the interim dividend as a result of the squeeze on its bottom line.

The bank's board, led by chairman John Schubert, has held the dividend pay-out at the same level as last year at $1.13 a share albeit that earnings per share dropped 19% to 146.3 cents a share. The pay-out to investors is equivalent to 86% of the bank's first half earnings.

No dividend guarantees


However, there was a warning from Mr Schubert this morning that given the worsening economic climate there was no guarantee that the Commonwealth, the country's second largest bank after Westpac following its merger with St George, would be able to hold dividends at ''past levels''.

That was an indication that if things continued to get worse, putting further pressure on the bank's earnings, then the group might have to consider cutting the pay-out - even by the year end at June 30.

Mr Schubert said the board was ''particularly mindful'' of the need of shareholders to maintain the half year dividend given the falls in payouts being experienced by investors right across the market.

Observers noted that there was little or no likelihood of a repeat of the increases seen over the last few years as the banks bunker down for a tough time for the economy over the coming 12 months.

The profit result was in line with the analysts expectations after the bank had updated the the market last week given the large rise in the headline figure caused by the BankWest gain.

But investors will be focusing on the operation of the bank's on-going operations and the impact of the rising bad debts on its performance.

These were expected to jump dramatically following increased provisions made by its three major rivals, in particular National Australia Bank and ANZ who have been topping up the funds set aside to cover soaring loans as the economy has turned down in the face of the global recession.

Bad debts


The Commonwealth said today that its bad debt position had been affected by a combination of a ''small number'' of single name corporates, increasing problems in its wider consumer and small business loan books and a need to cover for future problems.

In all, the bank has now taken its total provisions to more than $3.6 billion, a huge increase of $2.2 billion in just over 12 months from December 2007 when the economy started its downward slide.

And there was little prospect of better times ahead, particularly in the short term. The bank said that whilst indicators showed that credit growth and unemployment levels were still ''reasonably benign'' conditions over its second half were expected to become more difficult.

Chief executive Ralph Norris, who has recently faced criticism over a bungled capital raising aimed at shoring up the bank's balance sheet, did not gloss over the problems ahead but said that the Commonwealth remained in good shape financially.

''While it is always disappointing to announce a decline in earnings this is a solid result given the difficult economic environment which prevailed over the period.

''Although many financial institutions' business models are under pressure, we have remained open for business at a time when our customers clearly need our support.''

Retail arm profits rise


One of the stronger performing parts of the group has been its retail banking arm which saw its contribution to profits rise by 15% over the corresponding year-on-year period.

Its operating earnings rose from $975 million to $1.1 billion boosted by a ''flight to quality'' by nervous customers who sought the shelter of the major banks for their deposits and business as smaller banks and financial institutions wilted in the face of the worldwide financial crisis.

But CommBank's two other major divisions, premium banking which covers the corporate and large company sector and its wealth management arm which is directly exposed to the falling machinations of the stock market took large hits.

Premium, which has now been split into two separate businesses, saw its profits drop by 71%, from $707 million in December 2007 to just $205 million by the end of December last year.

Wealth Management which encompasses the giant Colonial First State funds management operation, was down by 56% at $175 million from $394 million last time.

International, which includes recession-hit New Zealand and the bank's other operations in Asia, held its drop to just 4%, from $289 million to $278 million. However, the New Zealand business continues to struggle in what Commbank said were ''difficult trading conditions'' across the Tasman.

The group's profit was struck on a strong rise in revenue, with income up across all of its divisions by 21% as they benefited from the turmoil in the financial sector which has seen the larger banks snap up smaller lending rivals.

In the case of the Commonwealth, it bought BankWest from the struggling British bank HBOS for $2.1 billion during the half and acquired a 33% in mortgage specialist Aussie Home Loans which itself has just bought Wizard Homes Loans from the financially-stretched US-owned GE Money.