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Sydney Morning Herald

The country’s largest bank, the Commonwealth, today helped lift some of the gloom that has descended on the domestic economy by reporting a 7% increase in its annual net profits to almost $4.8 billion.

Whilst the rise was not as high as last year’s initial optimistic predictions, the outcome was in line with market expectations after the most volatile trading conditions seen by the industry in 30 years.

With the global credit crisis still raging and the domestic economy having dropped away from its high growth levels of the past few years, the Commonwealth turned in a result that indicated that the slowdown may not be as sharp as some commentators have suggested.

Shares in Commonwealth Bank fell as much as 2.7%, or $1.20 cents, to $43.31, tracking losses on the benchmark index..

The bank’s cash profits - the industry’s preferred measure of performance - came in slightly lower with a 5% increase to $4.73 billion - just over $100 million more than its 2007 record result.

The profit was struck against a 10% jump in income to $14.3 billion. Cash earnings per share though were more subdued, rising by just 3% to 356.9 cents per share.

Analysts had been anticipating a relatively flat result given the way that global funding costs for banks have risen sharply and that lending growth to consumers has slowed in the face of the steep increase in local interest rates.

That was underlined by Commonwealth’s second half performance - which covers the six months from the start of January to the end of this June - where profits were up by just 1% to $2.39 billion.

This was after a subdued first half in which its interim result was struck just as the credit crisis was in full swing.

Commonwealth’s slowing profits also mean that the returns for investors won’t be so high either. The bank today declared a final dividend of $1.53, slightly up on the corresponding period a year ago, which takes the final pay-out of $2.66 - up ten cents or 4%. Last year the rise was 14%.

However, there were few signs of any nasty surprises in the result with the bank seemingly avoiding the bad debt problems of two of its Big Four rivals, ANZ and National Australia Bank.

Commonwealth, which is exposed to debt-stricken corporates like Allco Finance Group, said its total charge for the year has been $930 million which is nearly $500 million higher than 12 months ago.

That takes the bank’s total provisions to $1.74 billion as it steps up its cover for the possibility of more sour loans from hard-pressed consumers and businesses. However, the charge is significantly lower than some of its competitors.

In a reflection of how difficult trading conditions remain, Commonwealth described its performance as ‘’solid'’ but also warned that the economic headwinds it faced over the past year will continue to dominate the industry over the coming 12 months.

All of its main divisions - retail, business banking, wealth management, insurance, international and New Zealand - all did reasonably well, though, all turned in higher individual profit increases despite the pressures on them.

Its outlook statement was overly cautious, with the bank saying that the uncertainty and volatility in credit markets would continue to put pressure on its funding costs and that loan growth _ the key to future increases in the sector’s profit performance - would drop below the average of the past decade.

Those ten years have produced a golden run for earnings growth for banks but the downturn means that the record results are unlikely to be repeated in the immediate future.

Commonwealth’s chief executive Ralph Norris said this morning that whilst he accepted profit growth had not been up to those recorded in previous years, he was still pleased with the outcome given the period the bank had just come through.

As for the coming year, he said the slowing economy was affecting the bank’s customers which was showing up in slowing credit growth.

‘’Whilst these broad trends are clearly evident the duration and extent of the slowdown is more difficult to predict,'’ said Mr. Norris.

‘’There are clearly a number of negatives at work in the Australian economy but it is important that we recognise there are potentially a number of positive influences.'’

These he listed as rising commodity prices, the growth still coming through from the country’s Asian partners, particularly China, the recent domestic tax cuts and “robust'’ business investment and infrastructure spending.

‘’The balance of these opposing forces favour continued modest economic growth not too far below the average of the past decade,'’ added Mr Norris.

However, he also sounded a cautious note and said that The Commonwealth would continue to adopt a ‘’conservative stance'’ until more signs of economic improvement emerged _ a reference to the possibility of interest rate cuts by the Reserve Bank.

Today’s result caps a torrid time for the country’s banking sector which has been gripped by huge volatility in debt financing and equity markets, all of which has been primed by the global credit crisis that erupted exactly a year ago.

Commonwealth’s relatively stable if somewhat flat outcome will at least partly re-assure investors who have been rattled in recent weeks by the profit warnings that emerge from both National Australia Bank and ANZ about their forthcoming figures.

Banking shares took a massive hit last month when NAB revealed it had taken a provision of $830 million against its $1.2 billion of collaterised debt obligations, a portfolio of US subprime housing loan-linked investments.

That portfolio is now effectively worthless with a total charge of over a $1 billion against it - a move which will cut $600 million from NAB’s previously expected profit of $4.4 billion for this year.

ANZ’s annual earnings are expected to be $800 million lower and will only reach around $3.1 billion when it reports its results in three months time because of higher bad debt charges taken against its exposures to the hard-hit property and financial services sectors.

However, some immediate relief has been provided by the two Melbourne-based banks’ rivals in the last few days with Westpac, Bendigo and Adelaide Bank and just yesterday St George confirming that their 2007-8 earnings would all hit a record.

Nonetheless, all three banks stated how tough trading had become over the last six months as the combination of higher funding costs and the wild swings in equity markets - which hits their investment earnings - had put pressure on their margins.

They have also suffered a ‘’double whammy'’ effect with increased interest rates (partly pushed through by the banks themselves) rising fuel prices and soaring food bills have seen lending to consumers drop off at a faster-than-expected level.

This, in turn, has seen growth in the domestic economy tail off sharply with the effect that analysts now expect the banking industry’s 2009 financial year to be harder than the one that is just finishing.

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