Profit Slips But CBA Dividend Remains Intact

By Glenn Dyer | More Articles by Glenn Dyer

So much for any lasting damage to the Commonwealth Bank from the Hayne Royal Commission or the Austrac debacle.

Yes its reputation has been scarred, but not its financial or operational strength as the bank’s 2017-18 results yesterday confirmed.

It has sailed through all the bad publicity from the Royal Commission, the Austrac money laundering case and settlement and worries about lending and interest rates with very little lasting damage.

The Commonwealth revealed a full-year cash profit of $9.23 billion, down 4.8% from 2016-17 (after ignoring a series of one off costs). A record final and full year dividend will be paid to 800,000 or so shareholders, underlining its deep strength (and a certain nervousness on the part of the board to keep shareholders happy ahead of what will be a lively annual meeting later in the year).

Those shareholders have also benefited from a sharp turnaround in the share price since mid-June, and a further rise yesterday.

The recovery in the share price and the bank’s solid 2017-18 financial performance undermines all those concerns about CBA (and its peers). It also underlines that our big four banks are pretty resilient (although the National Australia Bank is taking a battering at the moment in the area of superannuation this week of a much more damaging level than the CBA endured).

There has been considerable fallout – bank’s senior management and much of its board have been turned over as a response to bad publicity at the royal commission and the Austrac money laundering scandal.

These changes and the bad publicity did impact the share price during 2017-18 sending share values lower until late June when they turned up as the end of the financial year (for the CBA) approached.

As usual some, not all investors got it right (the ones who got it wrong were the sellers). The CBA’s shares fell 12% in 2017-18, but in the June quarter they rose 0.7% and were up 6% in the month of June (which lifted the overall market).

The most recent low was on June 14 when the shares fell to $67.50. Since then they are up 8% and closed at $72.89 on Tuesday. The shares surged another 3% yesterday, closing at $74.81. The shares are now up well over 11% in the past two months.

The ASX 200 is up just 2% in that time – a clear outperformance by a stock supposed to be under pressure.

The results in fact reveal the limited extent of the bank’s ‘pain’ from all those disclosures at the royal commission and the bad publicity from the Austrac case.

The CBA’s key measure is its net interest margin – it rose five points to 2.15 cents in every dollar of income. It was 2.10 cents in the dollar in 2016-17 and supposedly under more downward pressure.

That rise came from the ending of the fixed term home lending boom which saw the CBA (and other banks) improve their profitability by lifting interest rates to a lot of home loan borrowers, especially those moving from fixed to variable rate loans. That’s why revenue was up 2.6% to $25.9 billion.

The bank’s return on equity (adjusted for the about to be sold or sold businesses) was 14.1% – down 160 points, (for example the bank reported one-off regulatory costs of $155 million associated with the Royal Commission, the AUSTRAC civil proceedings and the APRA Prudential Inquiry into CBA).

But that return is still ultra high at a time when the official cash rate is 1.50%.

That’s a sign of the bank’s continuing strength and its ability to ride out the impact of the royal commission, any change to lending or other activities and the poor publicity from the Austrac case. And finally this enabled the bank to keep shareholders sweet.

Final dividend was lifted one cent a share to $2.31 after the interim from also lifted by a cent a share to $2 a share, making for a record total for the year of $4.31 a share.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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