The Commonwealth Bank of Australia recorded a 21% drop in net income following the country’s first recession in nearly three decades, but benefited from a shallower downturn and an economic recovery much faster than initially planned to exceed expectations.

A key indicator of this recovery is the number of mortgages and small business loans still deferred, down more than 80 and 97 percent, respectively, from levels recorded at the end of June.

CBA chief executive Matt Comyn said those kinds of results were due to a much stronger economy than the bank feared to trade.

“We were expecting GDP to contract at least 5 percent over the last calendar year, that’s about half,” he told Peter Ryan on The World Today.

“The other major difference has been the strong recovery in the labor market – unemployment stands at 6.6%, only around 93,000 jobs remain to be created compared to pre-pandemic levels, which, in my opinion, is a remarkable achievement compared to our situation. 12 months ago. “

This better-than-expected economic performance helped the ABC report after-tax net income of $ 4.88 billion for the six-month period ended Dec. 31, while its preferred measure of cash profit, which excludes many gains and losses one-time, was down 11% to $ 3.89 billion.

A key part of the big difference between the two profit figures is a number of companies recently relocated by ABC, including Colonial First State and CommInsure Life.

UBS banking analyst Jonathan Mott said the cash earnings result exceeded market expectations by more than $ 100 million.

He added that this was a “strong and net result” which should give CBA good momentum for the second half of the year and could lead to increases in brokers’ stock price targets and to a possible buyback of shares from CBA in a full year. results in August.

Mr Comyn is cautiously optimistic about the outlook, telling the ABC he doesn’t expect JobKeeper’s end at the end of March to derail the recovery, but it will provide a test of strength underlying economy.

“There is nothing to worry about right now, but we recognize that this period between April and June in particular is a quarter on which we will keep a cautious outlook,” he said.

The ABC boss also acknowledged that there will be an increase in mortgage and business loan foreclosures this year as those who have not recovered from their COVID blow are forced to stop working on their homes and businesses. .

Low rates hurt bank profits

Despite a better-than-expected economic environment, the bank attributed the decline in cash profits both to the fallout from the COVID-19 recession, which forced it to increase its bad debt provisions, and to interest rates official resulting records.

A cash rate of only 0.1% and printing RBA money via a $ 200 billion quantitative easing program pushed mortgage interest rates to historically low levels and saw ABC’s net interest margin – a key source of profitability – drop from 2.11 percent a year ago to 2.01 percent now.

The net interest margin (NIM) is the difference between the rate the bank pays to borrow money (from financial markets or depositors) and the rate at which it lends it to households and businesses.

A drop in the NIM is good news for clients, as it usually means that RBA interest rate cuts are passed on to borrowers in the form of lower mortgage rates.

The bank said current low interest rates are expected to be a 7 basis point headwind for NIM this fiscal year, while increased competition among banks has also resulted in lower profit margins.

However, Mr Mott and Citi banking analyst Brendan Sproules both said the bank’s NIM drop was lower than most experts expected, which is even more positive in his results. .

The ABC added that it was compensating for declining profit margins by increasing mortgage lending 1.5 times faster than its competitors.

Bad debts rise, but loan deferrals fall sharply

The direct effect of the COVID recession on customers is being felt through an increase in bad debt provisions.

CBA recorded a loan impairment charge of $ 882 million, down $ 1 billion from its full-year results for 2020, but $ 233 million higher than pre-COVID levels over the course of from the same period of the first half of last year.

The bank increased its allowance for loan impairment to $ 6.8 billion, from $ 5 billion before COVID, and reported an increase in bothersome and impaired assets to $ 8.2 billion, noting the effect of the pandemic on aviation, entertainment, leisure and tourism business customers. and commercial property.

However, in good news for the bank, the number of deferred loans dropped dramatically in the second half of last year.

While repayments on 145,000 home loans valued at $ 51 billion were pending as of June 30, deferrals are now only 25,000 on mortgages valued at $ 9 billion as of January 31. .

Almost half of those mortgage deferrals are in Victoria, reflecting the deeper economic fallout from the state’s second coronavirus lockdown.

The decline in loan deferrals to small and medium-sized enterprises was even more marked, from $ 67,000 for loans worth $ 15.7 billion to around $ 2,000 for loans worth $ 300 million. dollars.

However, CBA chief executive Matt Comyn said the bank remained wary and “would continue to closely monitor our loan portfolios for any signs of stress.”

“We are prepared for a range of scenarios and have taken a conservative approach to provisioning.”

As part of its cautiousness, the bank announced a semi-annual dividend of $ 1.50, which is still 25% down from pre-COVID levels, but up 53% from its last dividend payment. in the midst of the recession.

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