Banks back to soaring profits ERIC JOHNSTON January 16, 2010
The Commonwealth Bank is poised to deliver a bigger-than-expected annual profit of nearly $6 billion after it issued a shock earnings upgrade yesterday in stark contrast to the world banking system, still struggling with the global financial crisis.
The improved outlook for the nation's biggest home lender, which has benefited from the Federal Government's taxpayer-backed guarantee, highlights the momentum building across the Australian economy. And the other big banks are expected to announce their own profit upgrades, particularly as the level of bad debts falls away.
While the Commonwealth imposed a pay freeze across its executive ranks at the height of the crisis, the rebound in profit is expected to provide a boon from next financial year for its chief executive, Sir Ralph Norris, helping him to improve on the $9.2 million package he was paid in 2008-09.
The prospect of a profit windfall comes at a sensitive time for the banks, which are still on the nose with customers for raising interest rates over and above the official rate rise while tightening their grip on the home lending market as competition fell away.
The Commonwealth slipped in quietly behind Westpac last year, raising its variable mortgage rate by 37 basis points, 12 points more than the Reserve Bank's official rise, and only 8 points shy of Westpac's widely criticised 45 point rise.
''Post the global financial crisis the strongest banks have just got stronger,'' said Stewart Oldfield, an analyst at E.L. & C. Baillieu Stockbroking.
Concerns about competition have intensified since the Commonwealth swooped on BankWest last year, delivering it a share of mortgages, credit cards and savings accounts.
The improved outlook for the banks is expected to increase pressure on the Treasurer, Wayne Swan, to rethink a range of support measures, including the funding guarantee that enables the big banks to borrow funds on global markets at cheaper rates.
In response to the financial crisis, governments are moving to crack down on excessive risk-taking by banks and the large bonuses paid to executives.
The US President, Barack Obama, is introducing a tax on Wall Street banks aimed at recouping losses from the massive bail-out of the financial sector. He said the tax, which is expected to raise $US117 billion ($125 billion), will tackle ''massive profits and obscene bonuses'' at banks ''who owe their continued existence to the American people''.
The Commonwealth issued its profit upgrade minutes before the close of the Australian market. Its shares rose 2.3 per cent to end at an all-time high of $58.10; this time last year they were at half that on fears the economy would be crunched by the global crisis.
A fresh batch of figures this week showed the economy was staging a stronger recovery than most experts expected, increasing the odds that the Reserve Bank will raise official interest rates from 3.75 per cent next month.
More than 35,000 jobs were created in the normally quiet month of December, and the unemployment rate continued its descent to 5.5 per cent, the Bureau of Statistics reported on Thursday. The strength of retail trade in November, which rose 1.4 per cent, also blew away economists' forecasts.
The Commonwealth said its first-half cash profit would rise about 44 per cent from a year earlier after solid income growth.
The bank's unaudited cash profit for the six months to December 31 will be $2.9 billion, up from the $2.013 billion of a year earlier.
The bank said the profit would be ''well ahead'' of the consensus analyst forecast of $2.7 billion and reflected ''a continuation of the momentum'' reported at its first-quarter update in November. It is scheduled to report its first-half earnings on February 10.
Key drivers of the result were solid revenue growth across the business, tight cost management and a drop-off in the lending losses that had played havoc with profits across the banking sector last year, it said.
Sir Ralph had said in November that the bad debt cycle had probably peaked.
Also helping the result was a $240 million turnaround in wealth management earnings as equity markets recovered over the six-month period.
In November the bank said that cash earnings for the three months to September had risen 27 per cent to $1.4 billion. At that stage the impairment charge was $700 million for the three months, little changed from the previous quarter.
