'Precarious': Is CBA making too much money from its customers?

Sydney Morning Herald Feb 8 2018 - 12:40pm

Clancy Yeates

An earnings boom in Commonwealth Bank's flagship retail banking arm has triggered predictions the division's profitability may be unsustainably high, as banks face pressure to put more emphasis on customers' interests over those of shareholders.

The standout performer in CBA's result this week , which was marred by a spike in regulatory costs, was the retail banking division led by the next chief executive of the banking giant, Matt Comyn.

The division includes CBA's vast consumer-facing bank, and its earnings swelled by 8 per cent to $2.7 billion, helped by a move to charge higher interest rates on property investor loans.

But with regulators applying the blowtorch to the banking sector, analysts questioned how sustainable it was for CBA's biggest division to be making so much money from its customers.

CBA's move to put aside $200 million to deal with a flood of regulatory pressures, including the royal commision, also highlighted the risk of rising compliance costs for the other banks, analysts said.

The debate over banking profitability came as National Australia Bank on Thursday reaffirmed targets to slash costs and boost investment as it reported unaudited cash profit of $1.65 billion for the last three months of 2017. NAB's profit was 1 per cent lower than in the September quarter, but still up 3 per cent from a year earlier. NAB shares were up more than 2 per cent in early afternoon trade.

Citi analyst Craig Williams estimated CBA's retail bank made a return on equity, a key metric of shareholder returns, of 30 per cent. This is double CBA's group-wide ROE of 14.5 per cent.

Mr Williams, who has a "sell" rating on CBA, said the bank's underlying result was positive, but the sustainability of returns in retail banking looked "even more precarious."

"The drums are clearly beating louder that the profitability of retail banking is under threat and cannot be sustained," Mr Williams said. "Given the industry has fallen out of favour with its political and regulatory masters, it seems likely that there will be a material recasting of the economics of the industry."

One of the key reasons behind CBA's high retail banking profit were hikes in interest-only home loan interest rates last year - a response to prudential regulations and a trend that has boosted the entire industry.

Outgoing chief executive Ian Narev acknowledged on Wednesday there were "pretty unique" regulatory influences on the bank's profit, and stressed bank profits needed to be seen over the economic cycle - as they are now benefiting from very low bad debts.

Mr Williams and other analysts said it would be harder for banks to engage in "re-pricing" when they are under scrutiny from a royal commission, the Australian Competition and Consumer Commmission's probe of home loan pricing, and a Productivity Commission inquiry into competition in the sector.

UBS analyst Jonathan Mott, who has a "neutral" rating on CBA, said most of the bank's revenue growth came from charging higher interest rates, rather than growth in the size of its loan portfolio, and CBA's net interest margin (NIM) in retail banking was the highest on record.

"We do not believe ongoing mortgage repricing to deliver earnings growth is a sustainable strategy in the current regulatory environment," Mr Mott said.

Morgan Stanley analyst Richard Wiles, who is "underweight" on CBA, also predicted a decline in CBA's total net interest margin, as customers switch away from more lucrative interest-only loans to principal and interest mortgages.

Bell Potter's TS Lim, who has a "buy" recommendation on CBA, said he saw value emerging in CBA's share price after a recent pull-back, and the result suggested the bank would "comfortably" maintain its ability to pay dividends. The bank raised its interim dividend by 1c to $2.00 a share, despite profits falling overall.

Credit Suisse analyst Jarrod Martin said CBA appeared "closer t0 the beginning than to the end" in dealing with its regulatory challenges, including the legal action over past breaches of anti-money laundering laws. Mr Martin, who has a "neutral" rating on CBA, said other banks may face about $100 million in extra conduct-related operating costs.

NAB's quarterly profit slows to $1.65b on higher costs, spending

Sydney Morning Herald Feb 8 2018 - 9:08am

Clancy Yeates

National Australia Bank's earnings momentum slowed in the December quarter, as profit margins declined and costs grew due to wage rises and higher investment spending.

The bank on Thursday reaffirmed targets to slash costs and boost investment as it reported unaudited cash profit of $1.65 billion for the last three months of 2017. The figure was 1 per cent lower than in the September quarter, but still up 3 per cent from a year earlier.

NAB said revenue increased by 1 per cent, compared with a 4 per cent rise in its costs, due to pay increases under its collective wage agreement with staff, and  higher investment spending.

The bank also said its net interest margin - what the bank charges for loans compared with its funding costs - had declined, but it did not say by how much.

At the same time, NAB's bottom line received a boost from falling charges for bad and doubtful debts, which dropped 23 per cent to $160 million.

In a further sign of strong credit quality,  the proportion of its customers more than 90 days behind on their loan repayments fell by 3 basis points, to 0.67 per cent, which it said was mainly because of better conditions in the New Zealand dairy sector.

NAB chief executive Andrew Thorburn reaffirmed targets the bank announced in late 2017 to boost its investment spending by $1.5 billion over the next few years and slash more than $1 billion in costs by the end of 2020. The targets include a plan to cut a net 4000 jobs, partly because the bank plans to automate tasks previously carried out by people.

"The acceleration of our strategy is well underway and we are pleased with early progress," Mr Thorburn said.

"Our financial performance for 1Q18 has been sound. Revenue is up, and asset quality and balance sheet strength are again highlights."

"Against a favourable economic backdrop including improving business confidence and continued strength in business conditions, we are optimistic about growing our bank by serving our customers better."

NAB's common equity tier one capital  (CET1) ratio, a key gauge of balance sheet strength, rose from 10.1 to 10.2 per cent, and it said it was on track to satisfy the regulator's requirement for a 10.5 per cent CET1 ratio by 2020.

The commentary was included in a trading update for the quarter, which included limited detail on other measures of the bank's financial performance.

As banks try to rebuild trust with the community amid fierce scrutiny from regulators and government, NAB said a key measure of customers' experiences with the bank was improving.

The net promoter score, which measures how likely groups of customers are to recommend the bank, improved in the quarter, yet other surveys still show a lack of confidence in banks overall.