CBA profit down 11%, but is it bad? 

Summary

• On 12 August, CBA released its FY20 report ended 30 June 2020, wherein, it stated that its underlying cash earnings from continuing operations fell by 11.3% to $7.3 billion, as the Bank had increased credit provisions against bad debts amid coronavirus.
• During the financial year, CBA's expense for impaired loans increased more than $1.3 billion to $2.5 billion, as a result of coronavirus provision.
• Number of home loans deferred and fell from a peak of 154,000 to 135,000 by the end of July, which was equal to 8% of the Bank's mortgage accounts.
• CBA's final dividend was 31% lower than 2019, but still higher than expectations, and would pay fully franked final dividend of 98 cents per share.
• NZX player, ASB Bank, the subsidiary company of CBA also announced a drop of 20% in its cash net profit in tis FY20 report for period ended 30 June 2020.

Shares of Commonwealth Bank (ASX: CBA) have given a positive return of 37.67%, between a low point of $54.26 on 23 March to a high point of $74.7 on 11 August amid the view that recession in Australia will not be as severe as was expected at the time of the onset of coronavirus pandemic.

The share price of CBA has recovered from the low prices witnessed in last week of March to close at $74.34 on 12 August, yet it is below the pre coronavirus level, of settling at $90.26 (as on 18 February 2020).

On 12 August, Commonwealth Bank released the annual report for the period ended 30 June. CBA’s bottom line was hit by charges for bad debts, with underlying cash earnings from continuing operations down by 11% to stand at $7.3 billion showing the early impact of coronavirus induced recession.

Some of the key financial highlights from the annual report are as follows:

• Operating income stood at $23.75 billion in FY20, up 0.8% on FY19, as volume growth in home lending and deposits offset the decrease in net interest margin.
• Net interest margin was noted 2.07%, down 2 bps because of the effect of lower interest rates, while operating expenses were at $10,895 million, rising up by 0.7%, driven by higher staff and IT costs, partly counterbalanced by lower remediation costs.
• Loan impairment expenses were recorded at $2,518 million, a rise of $1,317 million, inclusive of the $1.5 billion COVID-19 provision. The loan loss rate was 33 bps of average gross loans and acceptances.
• Final dividend, fell from $2/share noted in the half-year results in February to 98 cents per share, taking the full-year fully franked dividend to $2.98 per share.

ALSO READ: Getting Quarantined: Insurance and Bank Dividends Under New Restrictions by APRA

CBA increases bad debts provision due to COVID-19 impact

Since its last year's annual report, the firm doubles the funds it had put aside for bad loans (loan impairment expense) to ~$2.5 billion, inclusive of the $1.5 billion COVID-19 credit provision (as notified in its mid-May trading update and third quarter report).

The Bank has also provided an allowance for $6.4 billion towards bad loans and questionable debts equating to total provision coverage of 1.70%, up from 1.29% in June 2019.

CBA also confirmed that there are a total of $8.7 billion worth of loans that were troublesome or impaired mainly due to the impact of coronavirus on customers in manufacturing, transport and storage, culture and recreation, retail and wholesale trade, as well as continued weakness in sectors impacted by discretionary spending.

ALSO READ: Consumer Spending and Confidence dips due to COVID-19 outbreak in Victoria

Further, the number of home lending deferrals declined from a peak of 154k to 135k on 31 July, which is about 8% of the Bank's mortgage accounts, with outstanding balances of $48 billion. About 12% of deferred accounts are in higher risk category, while nearly 14% of the accounts are getting JobSeekar, out of which 58% are joint accounts with only one borrower on JobSeeker.

ALSO READ: JobKeeper Lifting Returns for Investors: A Look at 6 ASX listed Stocks that benefitted

Similarly, business lending deferrals have fallen from the peak of 86,000 to 59,000 active deferrals on 31 July, which is about 15% of the Bank's mortgage accounts with outstanding balances of $14 billion. Nearly 23% of deferred accounts are in the higher risk category, and about 30% are getting JobKeeper subsidy.

ASB financial results

ASB Bank, the subsidiary company of CBA, listed with NZX also released its FY2020 results for the period ended 30 June 2020, wherein, it announced a 20% fall in the cash net profit on the previous year, which was anticipated due to substantial impact of coronavirus and low-interest-rate setting.

The highlights of ASB FY20 report are as follows:

• Cash NPAT stood at $967 million, up by 20% and a rise was noted in ASB's impairment losses on financial assets to $306 million.
• Cash net interest margin fell by 12bps on the pcp to 2.11%.
• Operating income was down by 1%, while operating expenses surged up by 11%.

CBA’s Balance sheet remains resilient

The Bank remained well placed to help customers and the Australian economy amid COVID-19.

CBA’s final dividend of 98 cents per share to be paid on 30 September, was in line, with the banking regulator APRA's instructions for banks to preserve at least 50% of the earnings as a buffer against future losses related to COVID-19. The final dividend payout ratio stood at 49.95% of the second half statutory earnings.

Here are some highlights about capital, liquidity, and funding metrics of the Bank:

• The Group has a strong capital position with APRA (Level 2), CET1 capital ratio of 11.6%, beyond APRA's 'unquestionably strong' benchmark of 10.5%.
• The deposit funding ratio was 74%, increasing from 69% in FY19, as the Group fulfilled a substantial part of its funding requirements from customer deposits.
• CBA’s average liquidity coverage ratio (LCR) for the quarter ended 30 June was noted at 155%, substantially higher than the minimum regulatory requirement of 100%.

CBA’s CEO Matt Comyn stated that there is persistent uncertainty about the pandemic and the coming months would be critical, yet Australia is relatively well positioned, with more significant government support anticipated in the upcoming period. He also added that the critical stimulus measures have sustained the economy, along with a robust pipeline of infrastructure projects. Also, the outlook for mining and agriculture exports appear to be healthy.

ALSO READ: Uncertainties Arising from the Second Wave of COVID-19 (V2.0)

He also noted that the Government has declared that there will be some tightening of measures, yet the Bank envisions continued support, and monetary policy to stay accommodative in near future.