Commonwealth Bank of Australia lifts dividends with big profit

Profit ahead of expectations, dividends higher but still a cautious CEO.

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The Commonwealth Bank of Australia (ASX: CBA) has again rewarded long-term shareholders with a 14% increase in cash profit to $4,268 million for the half year – ahead of analyst expectations. In addition the board’s dividend payout ratio of 70% of earnings has been upheld with a payment of $1.83 announced.

Despite subdued market conditions, the bank grew revenues by 8% and improved its cost to income ratio by 90 basis points to 42.9%. Although the low interest rate environment has prompted many investors to withdraw their money from savings accounts and term deposits, in favour of higher-yielding returns, CBA managed to grow customer deposits by $40 billion to $426 billion, or 63% of funding.

Continued competition for deposits from its domestic peers, such as Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) and other regional institutions, put pressure on profit margins. As a result the bank’s net interest margin, a key measure of bank profitability, dropped 0.03% to 2.14%.

CBA’s long-term investments in technology and customers has started paying dividends and as a result it has become a more efficient lender. Return on equity improved while investment in technology, productivity and risk increased during the half with $589 million spent on long-term growth initiatives.

CEO Ian Narev said: “This result again demonstrates the benefits of our long-term strategic priorities – people, technology, strength and productivity. All of our businesses have performed well. We have strengthened our focus on enhancing the financial well-being of our customers and have used our leading technology platform to deliver innovative products and services to business and personal customers.”

The bank’s large Wealth Management division was a standout performer, growing funds under management by 22%.

CBA HY divisional performance
Source: CBA half-year results presentation

Although the bank grew above expectations, it remains cautious of the near future and has maintained high levels of liquidity. It was stated that, “given the uncertain outlook for both global and domestic economies, the Group remains cautious, maintaining a strong balance sheet with high levels of capital and provisioning. Liquidity was $137 billion as at 31 December 2013.”

Mr Narev went on to say: “There is little real evidence, so far, of a meaningful increase in investment in the rest of the non-resource sector of the Australian economy, other than in housing.”

Foolish takeaway

Unique amongst its peers, the Commonwealth Bank’s growth strategies focus on technology and delivering for customers. It has recognised the potential of overseas financial giants changing the way we pay for products and control our money. Today’s result was ahead of expectations but investors should be focusing on the big picture. The bank continues to be at its most dominant in the local mortgage and retail markets and is investing in long-term initiatives.

However, investors wanting to increase their exposure to the banking sector should be well aware of a number of important factors facing the industry. Firstly, profits are being boosted by low levels of bad debts which will almost certainly increase when interest rates inevitably rise, and secondly share prices are high – some banks are trading above two times book value. Although the banks are posting huge profits, it may be worth waiting until bad debts or interest rates rise and share prices fall.

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