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What investors will look for when Commonwealth Bank of Australia reports

Commonwealth Bank of Australia (ASX: CBA) will be the first of Australia’s big four banks to report its half-year results on Wednesday with analysts expecting a profit of around $4.1 billion to be announced, which would reflect an increase of nearly 8% compared to last year’s $3.8 billion result.

Earnings are expected to be boosted by a combination of factors. First and foremost, the low interest rate environment has made repayments easier which has resulted in a decline in bad debts. This was also one of the major drivers behind the big four posting a record annual profit of over $27 billion in 2013. Meanwhile, a pickup in the home loan market and improving asset quality in the commercial books, as well as a declining level of impairments has also helped boost profitability.

While a $4.1 billion profit will certainly please investors, there will be a number of other important results the market will be looking at. For instance, the low interest rate environment has created even greater competition across the banking sector which has led the banks to offer discounts on interest rates offered to customers which will cut into profit margins of new loans. As such, investors will be eager to learn whether the bank’s market share has grown or declined and whether the return on equity and cost of lending have improved or lowered.

Another major factor is dividends. The market’s search for high yielding dividend stocks was one of the primary forces behind the banks’ rallies last year and many will be hoping for a generous payout from the Commonwealth Bank. Morningstar analyst David Ellis has warned that “you will see the payout ratios remaining around the same, but you will see dividends growing in line with earnings per share growth.”

This is largely due to the new regulations facing the industry which will require the big four to hold an additional 1% of capital in reserve to act as a safeguard against an economic downturn. It is currently anticipated that Commonwealth Bank will increase its dividend for the half from $1.64 a share to $1.80.

Foolish takeaway

While Commonwealth Bank is the only major bank to announce its half-year results this month, Australia and New Zealand Banking Group (ASX: ANZ) will deliver its quarterly update on Tuesday and National Australia Bank Ltd (ASX: NAB) will deliver its next week. Westpac Banking Corp (ASX: WBC) will not provide an update this month.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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