Commonwealth Bank reports 11% profit fall but remains optimistic about Covid economic rebound

The chief executive of the Commonwealth Bank, Matt Comyn, said Australia’s biggest bank was prepared for further economic pain but positive about the country’s prospects as he unveiled an 11% fall in profit due to the coronavirus crisis.

Comyn said that by global standards Australia and New Zealand were well positioned to navigate the crisis – but recovery would take longer than first expected.

He said the second Victorian lockdown would have a “sharp impact” on Australia’s economy but he was hopeful it wouldn’t last long.

The bank has seen signs of economic decline out of Victoria since the state, which is a quarter of the national economy, entered a six-week lockdown on 2 August, that have included a 20% increase in requests for help from customers and falls in spending - although Comyn said these weren’t as steep as the falls seen in the nationwide lockdown in March.

“Clearly the broader lockdown in Victoria and Melbourne is going to have a sharp impact,” he said.

“We certainly hope that, as I’m sure everyone does, that it’s short-lived.”

Comyn was speaking as new figures from Westpac showed a collapse in consumer sentiment, with the index tumbling 9.5% in August, and wages growth figures for the three months to the end of June that, at just 0.2%, since the Bureau of Statistics started the index in 1997.

He said that nationally the bank saw “a sharp economic contraction during the course of the year as a result of the pandemic’”.

“Not quite as bad as we’d first feared, but certainly the pace of recovery does look like it will be longer.”

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Cash profit, the preferred measure of profit in the Australian banking industry, fell to $7.3bn in the 12 months to the end of June, compared to $10.3bn in the previous year, after the bank set aside $1.5bn to cover loans that go bad due to the Covid-19 recession.

The bank close to doubled its provisions for bad loans, to $2.5bn, and analysts expect this number to increase as more people default due to the recession.

Interest income also fell, due to record low official interest rates.

Hundreds of thousands of bank customers are not paying interest on their loans under an emergency provision introduced by the federal government in March.

CBA said it was still not receiving interest payments on 8% of its home loans, worth $48bn, although the number had reduced from a peak of 154,000 to 135,000 as of 31 July.

It said 15% by value of its business loan book – $14bn – was also not paying interest. The number of business customers with deferred loans shrunk to 59,000 from a peak of 86,000, the bank said.

Comyn said the bank was expecting Australia’s economic output, or gross domestic product, to slump by 4% this calendar year, before increasing by 2% next year – a number that remains below the long-term ambitions of the federal treasury.

“Unemployment is likely to peak towards the end of this calendar year at close to 10%, which is clearly a significant economic impact overall,” Comyn said.

While cash profit fell, the bank’s profit according to accounting standards rose 12% to $9.6bn.

This was due to profits reaped from the sale of businesses in CBA’s scandal-plagued wealth division, which the bank has been divesting in a bid to put behind it a history of negative headlines that helped prompt 2018’s banking royal commission.

However, independent experts hired by CBA two years ago following a scathing review of its governance and culture that was ordered by the prudential regulator said that “the greatest hurdles still lie ahead” in cleaning up the bank.

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In a report filed with the stock exchange alongside CBA’s financial results on Wednesday, experts from consultancy Promontory said the bank had come a long way but many of the most difficult changes needed were yet to be made.

“However, the greatest overall challenge for the program as it moves into its final phases, will be ensuring that the hard-won changes in CBA’s culture and NFR [non-financial risk] management are not only embedded, but that they are sustained,” Promontory said.

CBA paid a final dividend for the year of 98c, down about a third from the payment to shareholders the previous year.

Early in the pandemic the Australian Prudential Regulation Authority said banks and other financial institutions should not pay any dividends, but the regulator relaxed its stance last month.

Daniel Yu, an analyst at ratings agency Moody’s, said the cut in dividend was prudent “at a time when credit losses are likely to rise significantly”.

“Underlying performance remains solid, driven by strong growth in home loans and business lending, as well as household deposits,” he said.

“Asset quality metrics also remain robust, although they do not yet fully reflect the underlying challenges borrowers are facing.”