Cash Earnings: Commonwealth Bank of Australia (ASX: CBA) has reported an increase in loan payments and provisions together with pressure on margins for the third quarter ended 31 March 2016. Unaudited cash earnings for the quarter came to approximately $ 2.3 billion, which was slightly ahead of the same quarter in the previous year, but marginally below the consensus expectations. The credit policy continued to be satisfactory while the bank said that there are remaining pockets of weaknesses which warrant caution, particularly in the face of the continued global volatility. Arrears of personal loans continue to be elevated along with the presence of seasonal factors. Third quarter cash profits showed an increase.
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Strength in terms of Liquidity, Capital and Capital Movement (Source: Company Reports)
Loan Impairments: Expenses for loans impairments were higher at $ 427 million amounting to 25 basis points of gross loans and this was in line with the expectations though, up from $ 256 million in the previous year. Consumer arrears rates were also in line with expectations during the quarter and home loan arrears continue to remain on the low side. However, there are areas in Western Australia and Queensland, which continue to be affected by the downturn in the mining industry. The higher level of loan impairment were largely due to a small number of exposures in the institutional lending portfolio of the group, which showed signs of impairment or heightened stress, including one single relatively large domestic exposure, which affected a syndicate of lenders, including other major banks in Australia. The corporate borrower in question is believed to be Arrium, the steelmaker, which is in trouble. The bank said that it was maintaining levels of provisioning while the total provisions at $ 3.9 billion were higher.Fund managers were of the opinion that the bank could increase provisions in the coming months, which could lead to pressure on profits. In view of the statement from the bank that one large institutional borrower was responsible for much of the increase in impairment; there could also be concerns about losses from other loans with exposure to commodities.
Interest Margin: The group interest margin remained largely the same as the first half of FY 2016, when it was 2.06%. Experts believe that this is disappointing because of the benefits that should have been accrued from the mortgage rate rises, which occurred out of cycle in the previous year.
Other Financial Attributes: Growth in operating income followed the same lines as the first half of FY 2016, but expenses grew partly because of ongoing investment and costs relating to regulation and compliance. Home lending growth in volumes was in line with recent trends while growth in domestic business spending stayed at single-digit levels and household deposits showed a growth above the average of the other banks. The fund management business continued to be tougher with income continuing to be affected by declining investment markets. The bank reported a softer capital ratio in the first half of FY 2016, but the common equity tier 1 ratio was 10% as at 31 March 2016, which was a growth of more than 50 basis points over 31 December 2015 after eliminating the impact of the 2016 interim dividend and was mainly because of the generation of capital
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