Commonwealth Bank could report another record high profit this week — here’s what to watch

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Commonwealth Bank of Australia, the nation’s largest lender, is expected to report an all-time high half yearly cash profit of $4.83 billion on February 15.

Still, that will be up just 1% from the $4.8 billion reported a year earlier. Cash profit excludes one-off items.

Profits are expected to be driven by higher lending and revival in fee income. The CBA is expected to declare an interim dividend of $1.98, unchanged from last year.

The lender’s report comes as the profit juggernaut for Australian banks grinds to a halt. After seven consecutive years of record profits, banks are struggling to expand earnings as bad debts begins to climb once again, margins shrink amid rising competition and regulatory changes aimed at making them safer add to costs.

Here are the five things to look for in CBA’s earnings

1. Net interest margins: Investors have turned optimistic on net interest margins, a key measure of lending profitability, recently after banks raised mortgage rates. Analysts from Morgan Stanley and Goldman Sachs expect margins to drop by as much as 3 basis points from low interest rates, weak spreads on deposits and rising cost of funds in bond markets. Australian banks tap credit markets for a third of their funding needs.

In its first quarter update, the CBA flagged margins were lower.


2. Cost growth: The lender typically targets to cap cost growth below that of revenue expansion. Amid challenges, analysts expect the CBA to come up with a 3% annual cost growth target. That compares with a 4.4% increase in expenses in the previous year. Rival National Australia Bank said costs soared 5% in the its first quarter ended December 31 largely due to a new wage agreement and charges for job cuts.

3. Asset quality: Banks had a scare last year as a series of corporate collapses and sliding commodity prices threatened to blow out bad debts. With commodity prices rallying, it looks as if the banks have seen the worst. Still mortgage defaults are starting to nudge up especially in the mining states of Queensland and Western Australia. Goldman Sachs analysts expect asset quality to hold up and is only forecasting only 20 basis points increase in sour loans.


4. Capital position: Even though potential regulatory changes have been delayed, capital remains an area of focus as CBA’s equity levels lag its main rivals. Analysts expect CBA to sell some assets and lean on dividend reinvestment plans, where investors swap all or part of their dividends for new shares, to bolster capital.


5. Strategy changes by new chairman: Morgan Stanley expects the appointment of Catherine Livingstone as Chairman to possibly lead to some strategic changes. It sees the potential for a review of expense targets, institutional banking strategy, mortgage market pricing tactics, offshore growth options and asset sales.