CBA earnings hit 4-year high on improved loan book

Company News

by Glenn Dyer

Commonwealth Bank of Australia (ASX:CBA) posted its highest annual cash earnings in four years, partly thanks to a now faded first-half surge in home lending.

As well, a big improvement in its loan impairment costs helped boost cash earnings considerably as the impact of Covid eased.

And with gloom and doom abounding as the Reserve bank lifts rates to fight inflation, the CBA thinks that will be a positive for it as it will help push up its net interest margin after an 18-point fall in the year to June 30.

Australia’s largest lender said cash net profit after tax was $9.60 billion in the year to June 30, almost $1 billion higher than the $8.65 billion earned in 2020-21.

CEO Matt Comyn, however, said rising interest rates due to soaring inflation were hurting consumer confidence.

“We expect consumer demand to moderate as cost-of-living pressures increase,” Comyn said.

“It is a challenging time, but we remain optimistic that a path can be found to navigate through these economic conditions,” Comyn said, adding the medium-term outlook for Australia was positive.

The bank’s net interest margin fell 18 basis points to 1.90% amid stiff competition in home lending and an increase in low-yielding liquid assets.

“Group NIM declined due to a large increase in low yielding liquid assets and lower home loan margins,” the bank explained in Wednesday’s release.

But this will be a temporary situation with the CBA predicting that “margins (are) expected to increase in a rising rate environment.”

With the bank keeping a lid on costs in the year to June, the bank’s ‘jaws’ – improved as costs fell faster than income grew.

In fact its cost to income ratio improved to a low 45.9% at June 30 from 47% at the same time last year.

Operating expenses fell 1.5% over the year – (faster than the 1% rise in revenue) news that investors should welcome after taking fright at the National Australia’s Bank warning of higher costs in its year to September 30 update on Tuesday.

Revenue rose just 1% to $24.38 billion.

The bank declared a final dividend of $2.10 per share, compared with $2.00 last year. That took the total for the year to June to $3.85 a share with the higher interim of $1.75 a share ($1.50 previously). That was a rise of 10% in the annual payout to shareholders.

Troublesome and impaired assets fell to $6.4 billion at year-end, compared with $7.5 billion last year.

The CBA revealed that its loan impairment expense fell $911 million to a benefit of $357 million for the year to June “driven by reduced COVID-19 overlays partly offset by increased forward- looking adjustments for emerging risks including inflationary pressures, supply chain disruptions and rising interest rates.”

Rival National Australia Bank had on Tuesday reported a 6% rise in earnings, but warned on costs for the second time in four months.

CBA has also confirmed it has written down the value of its stake in the Swedish buy now pay later group Klarna by $2.3 billion, wiping out a substantial part of the buoyant $2.7 billion value set at June 30, 2021.

That value was cut to $2.48 billion at the end of December 2021, as the value of Klarna declined in the gradual easing of values of buy now pay later companies which as Afterpay (which was bought by Block in late 2021).

The large write down was not highlighted anywhere in the CBA announcements yesterday of its annual results and financials. The write down was revealed the CBA’s 2021-22 annual report in the Notes To The Accounts on Page 247.

A series of failed capital raisings in the six months to June by Klarna saw its market value tumble – it was valued at $US46 billion in June, 2021, and a capital raise in July clashed that to less than $US15 billion, meaning the CBA, which participated in the raising last month, would have to slash most of the value of its holding.

The CBA now values its stake at $A408 million.

“As at 30 June 2022, the Group held an unlisted equity investment in Klarna Bank AB (Klarna) measured on a recurring basis at fair value through other comprehensive income of $408 million (30 June 2021: $2,701 million).

“The valuation of the investment as at 30 June 2022 was based on a methodology leveraging inputs relating to a private equity capital raise executed by Klarna on 11 July 2022, in which CBA participated. The revenue multiple implied in the price of the capital raise was 4x.

“The valuation as at 30 June 2021 was based on a private equity capital raise on 10 June 2021, in which CBA did not participate, as well as revenue multiples of market listed comparable companies and significant unobservable inputs including adjustments for market volatility and liquidity.

“Comparable listed companies were included based on industry, size, developmental stage and/or strategy. A revenue multiple was derived for each comparable company identified and then discounted for considerations such as illiquidity and differences between the comparable companies and Klarna based on company-specific facts and circumstances.

“The range of implied revenue multiples applied by the Group in assessing the fair value was 29-36x. The Group adopted a revenue multiple of 32x in its valuation as at 30 June 2021.

“The $2,293m reduction in valuation from 30 June 2021 to 30 June 2022 was driven by changes in the valuation implied from each private equity capital raise, as well as the reduction in revenue multiples of market listed comparable companies”.

And auditors PwC noted in their report:

” We considered the equity investment in Klarna to be a key audit matter due to the financial significance of the fair value movement in the year.”

Investors didn’t take a view on the CBA result and commentary (they even ignored the lack of any guidance). CBA shares ended down 0.2% at $101.

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