Commonwealth Bank Profit Rises on Deposits, Fund

Commonwealth Bank of Australia, the nation's second-largest, said first-half profit rose 10 percent to a record on higher earnings from low-cost deposits and increased fund-management fees.

Net income rose to A$2.19 billion ($1.71 billion), or A$1.70 a share, in the six months ended Dec. 31, from A$2 billion, or A$1.57, a year earlier, the Sydney-based bank said today.

Commonwealth, the nation's largest fund manager, is earning more wealth-management fees after Australia's stock market rose 12 percent in the half. The bank also benefited from higher deposit margins after charging more for loans and keeping savings rates steady after increases in official interest rates.

``They don't tend to pass on all the rate rises to deposit products,'' said Atul Lele, who helps manage $360 million at White Funds Management in Sydney, including Commonwealth shares.

The Reserve Bank of Australia raised its benchmark interest rate by a quarter percentage point in May, August and November to 6.25 percent. Commonwealth increased its lending rates in step with the overnight cash rate target, though left interest it pays on its transaction account unchanged at 0.01 percent.

The bank has A$86.4 billion of household savings, more than twice as much as its nearest rival National Australia Bank Ltd., Australian Prudential Regulation Authority data show.

Shares of Commonwealth rose 15 cents to A$51.75 at 12:47 p.m. in Sydney, putting it on track for a record close. The stock is up 18 percent in the past year, outpacing a 15 percent gain in the eight-member S&P/ASX 200 Banks Index.

Fund Management

Australia's four biggest banks have all reported record operating earnings in the past four months, benefiting from an economy in its 16th consecutive year of growth and unemployment near a three-decade low.

Commonwealth is also earning higher fund-management fees after Australia's benchmark S&P/ASX 200 Index surged to a record in the half, outpacing the S&P 500 Index in the U.S. and almost doubling the advance in the U.K.'s FTSE 100 Index.

The bank's Colonial First State fund-management unit lifted assets under management by 11 percent to A$168 billion in the half, when the unit's profit rose 27 percent to A$232 million.

``Funds management showed above average growth and will be quite a positive for the bank as time goes on,'' said Peter Vann, who helps manage $1.1 billion at Constellation Capital Management in Sydney, including Commonwealth Bank shares.

`Interest Rate Rises'

Commonwealth will pay a first-half dividend of A$1.07 a share, up from 94 cents a year earlier. Revenue rose 13 percent to A$16.3 billion. The profit beat a A$2.15 billion median estimate of six analysts Bloomberg News surveyed by telephone.

The net interest margin in banking, a measure of profitability, fell to 2.22 percent from 2.29 percent in the previous half. Each 25 basis-point increase in the official cash rate adds A$25 million to interest income in a full year, Chief Financial Officer David Craig told reporters. Higher cash rates added 3 basis points to the profit margin on deposits.

``Recent interest rate rises in Australia will really benefit returns from Commonwealth's very large deposit base,'' said Rohan Walsh, who helps manage almost $2 billion as head of Australian equities at Invesco Asset Management in Melbourne, before the result. Invesco holds Commonwealth Bank shares.

High-Yielding Deposits

The interest margin at Westpac Banking Corp., Australia's fourth-largest bank, slumped to 2.19 percent in the half ended Sept. 30, from 2.4 percent in the previous six months, as it battled for loan customers and offered high-yielding deposits.

On a cash basis, which excludes employee pension plan costs and some one-time items, earnings-per-share rose 17 percent to A$1.75. ``The group remains well on track to deliver cash earnings-per-share growth which meets or exceeds the average of its peers,'' Chief Executive Officer Ralph Norris, 57, said.

Cash EPS at Australia & New Zealand Banking Group Ltd., the No. 3 Australian bank, rose 13 percent in the fiscal year ended Sept. 30. At Westpac, it rose 10 percent in the same period.

Commonwealth's cost-to-income ratio in the banking operations improved to 45.6 percent from 48.1 percent a year earlier as revenue gains exceeded growth in expenses.

On Australia's economy, Norris said inflation is moderating and interest rates may have peaked. ``I would expect that the next interest rate move would be down,'' he told reporters.

source:www.bloomberg.com