CBA is picking up profit growth from investor loan margins

Photo: Mark Metcalfe/Getty Images.

The Commonwealth Bank, punished by investors after a flat quarterly result a few months ago, now has a clearer story to tell on profit growth over the next 12 months.

The bank will be helped in the pursuit of profit by higher interest rates on property investment loans, part of moves to dampen investor activity in the property market and keep within APRA-imposed limits.

Some analysts are waiting to see how long before one of the big banks breaks and reprices owner-occupied home loans as well. The Commonwealth will do well on investment loans alone. With 37% of the bank’s home loans with investors, the repricing will add about $300 million to the bank’s margins.

“I expect there will be further repricing not just by the Commonwealth Bank but all four major banks,” says David Ellis at Morningstar.

“And maybe not just the investor home loan books, it might spill over to the owner-occupied books.”

The bank today posted a full year cash profit of $9.137 billion, up 5%. It is also raising $5 billion to meet stricter capital rules, the last of the big four banks to announce its plans to meet APRA requirements.

But the results also showed a softening of profits in the second half compared to the first six months.

“But that was due to higher expenses and some of them won’t be repeated in 2016,” Ellis says.

So those costs will come out and will further improve profits.

The $9.137 billion cash profit is a record and means the bank makes more than $1 million profit each hour of the day, every day of the year.

“It’s pretty upbeat,” says Ellis. “5% growth in profits and 5% growth in dividends. They maintained their dividend target growth ratio of between 70% and 80%. And the capital raising has been managed professionally … so overall if I was a Commonwealth Bank shareholder I would be happy.”

Ellis says quarterly updates, which saw the CBA report flat results and higher costs, can be volatile and misleading.

“Westpac doesn’t even do quarterly updates anymore because of that,” he says

“In the quarterly update there was concern that cost growth was getting a bit out of control. And today they say there’s a lot of compliance costs, regulatory costs, which won’t be there.”

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