Australia's largest bank, the Commonwealth Bank (ASX: CBA), has posted a 6% rise in cash earnings to $3.78 billion for the half-year, and is on track to beat last year's record full year profit of $7.1 billion.. Cash earnings are the preferred measure used by banks, as it strips out one-off costs and gains.
The result was driven by a 4% rise in loans to $649 billion, a recovery in the Wealth Management division and the Institutional Banking and Markets division rebounding.
Commbank declared an interim dividend of $1.64 a share, up 20% on last year, although that was partly driven by an increased payout ratio of 70% compared to 61% last year. The full year dividend for 2013 will likely be lower than the 2012 financial year's, as the payout ratio drops back to a normal rate.
While some commentators have suggested it was a 'cracker' result, there were some negatives. The bank's net interest margin fell by 2 basis points, and return on equity (ROE) continues its downward trend, falling 1.1% to 18.1%. The fall in net interest margin was most due to an increase in retail and business deposits now totalling $376 billion, combined with higher overall deposit rates, and lower mortgage rates.
63% of Commbank's funding now comes from customer deposits, but the increased competition between the banks means deposit interest rates have stayed relatively high, despite cuts to the official cash rate.
With conditions in the wholesale market easing, banks may again look to obtain a higher proportion of their funding from offshore, which would allow them to drop deposit rates further, and improve their margins. All of the big four major banks, including ANZ Bank (ASX: ANZ), Commbank, Westpac Banking Corp (ASX: WBC) and National Australia Bank (ASX: NAB) have taken the opportunity to raise funding in the wholesale markets recently.
Foolish takeaway
The bank is forecasting a slow rebuilding of consumer and business confidence in 2013, but credit growth remains in the low single digits. With Commbank's shares up 34% in the past year, and its dividend yield falling below 5% (before franking), investors could be forgiven for looking at cheaper alternatives.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned.
