$2.4b Bank Profit Will Put It In The Firing Line

Sydney Morning Herald

Monday February 11, 2008

Danny John

THE Commonwealth Bank will reveal net half-year cash profits of at least $2.4 billion this week, putting it in the politicians' firing line after its controversial decision to raise home loan interest rates by more than last week's Reserve Bank increase.

As the first big bank to report its earnings figures since the liquidity crisis swept through corporate balance sheets, the bank is expected to announce a decline in margins greater than previously expected in the wake of the global credit crunch.

But the margin erosion in key parts of its lending business and a keenly awaited statement on the bank'simmediate prospects from its chief executive, Ralph Norris, at Wednesday's results announcement will do little to blunt criticisms surrounding its expected 7 to 9 per cent increase in interim profits.

The bank's decision last week to raise its standard variable home loan rate by 30 basis points instead of the 25 basis points pushed through by the Reserve Bank prompted a verbal barrage led by the Treasurer and consumer groups angered by perceived profit-making on the back of hard-pressed mortgage holders.

All banks, facing higher funding costs because of an increase in borrowing on wholesale financial markets, have sought to recoup part of these expenses by raising mortgage rates above the level normally set by the Reserve Bank.

The five leading banks - Commonwealth, ANZ, National Australia Bank, Westpac and St George - imposed an average 15 basis points or 0.15 per cent increase last month in the first such move. ANZ found itself under criticism last month when it pushed through a 0.2 per cent rise, while the Commonwealth escaped the main brunt of the criticism with an amount half of that.

But having gambled and failed that its funding pressures would ease between early January and last week's Reserve Bank decision, the Commonwealth found itself badly exposed in having to make up part of the financing difference just as mortgage rates hit 9 per cent - the highest for 10 years.

The bank's defence that it has swallowed the increased costs for the best part of five months - a period covering the bulk of its latest half-year figures - is unlikely to win it many supporters outside financial markets, especially given the continuing increase in profits.

Analysts are anticipating Commonwealth will have suffered more in terms of lower margins than its rivals given the unfortunate combination of two factors.

First, says ABN Amro, it will be the first bank to report half-year results that cover the worst period of the credit crunch, while its rivals will have a couple of extra months before their May disclosure dates to make up some of costs if the crisis begins to ease.

Second, the mortgage rate increase last month came too late to help reduce the impact on margins.

ABN Amro is expecting a profit performance of $2.42 billion, up 7 per cent on last year, while Macquarie Equities has pencilled a 9 per cent rise to $2.48 billion.

© 2008 Sydney Morning Herald

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