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Commonwealth Bank of Australia reports: What you need to know

Commonwealth Bank of Australia (ASX: CBA) shares have fallen today after the bank revealed a sluggish third-quarter update before the market opened this morning.

The bank revealed a cash profit of roughly $2.3 billion for the quarter. While that reflects an improvement on the $2.2 billion earned in the prior corresponding period, it was below the average of the first two quarters from the year, which were roughly $2.4 billion each (based on its cash profit of $4.8 billion for the entire half).

Like its major rivals did last week, Commonwealth Bank also reported an increase in its loan impairment expense, or bad debt charges. The low interest rate environment has seen bad debt charges fall to record low levels in recent years, pushing earnings higher, but this latest round of earnings updates suggests that trend may have reached a tipping point.

The bank reported a $427 million bad debt charge for the quarter – a big jump from the $564 million charge for the entire first half. The bank said (emphasis added):

The increase is largely due to a small number of exposures in the Group’s institutional lending portfolio which became impaired or exhibited heightened signs of stress, including a single relatively large domestic exposure with a syndicate of lenders including other Australian major banks. As a result, Group Troublesome and Impaired Assets were also slightly higher in the quarter, at $6.3 billion.”

Notably, it is likely that the “single relatively large domestic exposure” is a reference to junior iron ore miner Arrium Ltd (ASX: ARI). Unable to cope with the enormous amount of debt on its balance sheet or the plunging iron ore price, the company was forced into voluntary administration in April.

Notably, Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC) were also part of Arrium’s lending syndicate.

What should be pleasing to investors, however, is that the bank said its home loan arrears remained low. While mining-affected areas of Western Australia and Queensland are an exception, that should come as a sign that calls for a housing downturn earlier this year were overblown.

Commonwealth Bank’s shares fell 0.6% shortly after the market opened, while they have fallen 13.6% since the beginning of the year.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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