The Commonwealth Bank of Australia (ASX: CBA) share price will come under scrutiny this morning after revealing its third quarter trading update for the three months to 31 March 2018.
The headline figure is that Commonwealth Bank has generated unaudited cash net profit after tax (NPAT) of approximately $2.35 billion for the quarter, whilst the statutory net profit came in at $2.3 billion.
In its release, Commonwealth Bank compared the March quarter's profit to the average quarterly profit of the first-half of FY18. Using that comparison, cash NPAT was down 2% on a reported basis and 9% on an underlying basis.
Commonwealth Bank included a $375 million expense provision for an estimate from the AUSTRAC proceedings in the reported figure, the "underlying" comparison excludes the AUSTRAC provision.
It must be said that a year ago the unaudited cash earnings was around $2.4 billion, which appears to be an increase on this quarter's result of $2.35 billion.
The bank said that underlying (and reported) operating income decreased by 4% compared to the half-year average. However, when excluding the fact that the quarter has two fewer days – which had a $100 million impact – the net interest income was essentially flat. Higher volume growth offset a small decline in the bank's net interest margin (NIM) from switching from interest only to principal and interest.
Other banking income was lower by a lower treasury and trading result, as well as seasonally lower card fee income.
The underlying operating expense increased by 3%, which was driven by increased provisions for regulatory and compliance project spend.
Commonwealth Bank's CET1 (APRA) ratio continues to improve – it was 10.1%, which was a 0.37% increase since December 2017 after allowing for the interim dividend.
The bank also separately announced that it and ASIC had agreed in-principle a settlement over claims relating to the manipulation of the bank bill swap rate (BBSW). According to the release, Commonwealth Bank will acknowledge that on five occasions during 2012 it "attempted to engage in unconscionable conduct". It will pay a $5 million penalty, pay $15 million to the financial consumer protection fund and pay $5 million to ASIC. This will be in the full-year result.
For me, the most troubling part of the update was the increase in consumer arrears of home loans of more than 90 days. In December 2015 it was 0.47%, in June 2017 it was 0.60%, in December 2017 it was 0.59% and in this quarter it was 0.65%. These figures exclude reverse mortgage, Commonwealth portfolio loan and residential mortgage group loans, so the figure including those could be higher. The simple conclusion is that arrears are rising, if arrears continues to rise there could be trouble down the track.
Foolish takeaway
Commonwealth Bank has generally done better than its peers since the GFC, so one quarter isn't enough to say it isn't the best bank. But, I think it goes to show that profit growth could be hard to come by in the near future. The grossed-up dividend yield of 8.36% isn't enough to entice me to buy shares at today's price.
