CBA Disappoints Analysts

  Commonwealth Bank shares weakened yesterday after the bank refused to give analysts an upbeat outlook on dividend hikes or capital management issues.It's yet another example where the & #160;analysts are defying logic and know little of what is going on.The shares jumped on the solid rise in profit and 6% (7c) rise in the interim dividend to & #36;1.20 a share, peaking at & #36;53.20, up nearly 60 cents.But they fell back after the analysts went sour on the stock, shedding 89c to close weakly at & #36;51.83.But the bank and CEO, Ralph Norris, wouldn't go the way the analysts wanted and talk bullishly & #160;in a conference call about payout ratios, share buybacks and higher dividends.Mr Norris was circumspect, even though analysts pushed for the line that the bank has & #36;6 billion in extra capital.The analysts seem to forget there's a very good reason for having that surplus capital: the financial crisis is still echoing its way through the markets (witness the sell-off in the past week) and as well, bank capital requirements are going to be tightened considerably this year.Banks like the CBA will have to have enough capital and liquid unencumbered assets on their balance sheets to be able to withstand a month of being cut off from funding markets.That's what happened in late 2008 when the Reserve Bank funded it and the rest of the financial sector with over & #36;45 billion in aid to keep them and the economy & #160;alive.Bank regulators, led by APRA, but with the RBA and ASIC involved, are finalising the new capital requirements for the banks and other deposit taking financial groups in Australia.It's part of an international move. & #160;Banks in other countries don't have surplus capital on hand to allocate like the CBA and other Australian banks do.Some of the & #36;6 billion in extra capital at the CBA will be needed to be held on its balance sheet under the new regime. How much, we don't know yet. & #160;Mr Norris is reluctant to agree to these proposals, but he will have to. Australian banks remain dependant on offshore funding and access to capital markets.The dividend increase should, for the moment, be looked at as an interim step, not a finality.This solid result was also due to the involvement of the federal government by way of the stimulus packages and the about to be removed & #160;fund raising guarantees. & #160;They were vital in stabilising the markets and boosting confidence in the economy, limiting the impact of the crunch and recession here.That helped all companies, especially the banks and especially the first home buyers scheme which provided the only growth for the bank in lending in the half year.Earnings were up 54% on the depressed returns of a year ago: & #36;2.9 billion versus just over & #36;1.9 billion as bad debt provisioning pressures eased (down 29% on a year ago).While the bank had warned of the improvement in an update last month, how it managed to drive earnings was interesting: a 19% rise in interest income (when the bank has been complaining about the cost of attracting fresh deposits).That came & #160;as official rates were at near record lows. It's the extra 1% or thereabouts that it's managed to rip from home loan customers during the period of rate cutting and rate rises, as well as charging more for loans to small business, credit card holders and big business (when they borrow).The most telling fact was the CBA's & #160;net interest margin. It & #160;rose to 2.18%, from 1.99% in the same period of 2008.That 0.17% boost took the margin to the & #160;highest level since June 2006. & #160;Home lending jumped 17% to & #36;311 billion, domestic deposits were up 6% to & #36;328 billion, partly offset by lower business lending, down 5% to & #36;156 billion. & #160;The bank's cash net profit for the six months ended December 31 rose to & #36; & #36;2.943 billion from & #36;2.013 billion.More than 40% of & #160;earnings came from its retail arm which turned in net profits of & #36;1.24 billion. A strong recovery in the & #160;institutional and corporate division (where many of the dud loans were, such as ABC Learning) saw & #160;a & #36;713 million turn-around, with the division earning a cash profit of & #160; & #36;545 million.Mr Norris said the economic outlook has improved and that Australia now appears to be on the road to a sustainable recovery. & quot;That is likely to bring with it a gradual improvement in demand for credit in the 2010 calendar year accompanied by continued upward pressure on our funding costs, & quot; he said. & #160;  

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