This morning the Commonwealth Bank of Australia (ASX: CBA) reported cash earnings of $2.65 billion for the quarter ending September 30 2017, which represents growth of 6% over the average of the first half of 2017.
The strong result was supported by higher lending rates imposed on interest-only home loan borrowers and general mortgage repricing partly in response to a regulatory crackdown on higher-risk lending.
The total net interest margin (NIM) lift was offset by rising expenses associated with provisions for compliance costs related to AUSTRAC's civil claim against the bank for breaches of its suspicious transaction reporting procedures.
The CBA also potentially faces a chunky fine over its compliance reporting failures, although this is unlikely to move the needle on the bottom line.
The bank's capital adequacy ratio (CET-1) gained 55 basis points in the quarter to 10.1% (allowing for payment of the final dividend) with the falling ratio of credit risk weighted loans offset by rising interest rate risks associated with balance sheet liabilities.
CBA's sale of its troubled life insurance business to AIA Ltd is also expected to help alleviate the toughening regulatory demands on capital by adding a pro-forma 70 basis points to the CET-1 ratio assuming the sale is completed in 2018.
Bad debts across consumer and business lending also continued to fall.
In fact quarterly loan impairment expenses fell 20% in what reflects a benign banking environment of record-low-interest-rates, despite the big banks' CEOs predictable complaints over "challenging conditions" or the like.
Outlook
CBA updated that 68% of its funding came from (profitable & low cost) deposits, which given its emphasis on home loan lending backed up by prudent risk management suggests CBA's conservative management is positioned to deliver superior medium-term returns to investors.
Among the big-4 banks, CBA retains the highest return on equity and is a mile ahead of competitors like National Australia Bank Ltd (ASX: NAB) in terms of technology platforms.
As such it remains my pick for income seekers in the big bank space, despite the marginally higher valuation on price-to-book or earnings ratios.
Moreover, recent share price wobbles over the AUSTRAC investigation give investors the opportunity to pick up the stock at a discount thanks to the reputational, but largely non-financial damage.
In early trade the stock is 1.1% higher at $79.09 and I expect will be the best performing bank of 2018.
