ABC profits hit 4-year high on improved loan book – ShareCafe
The Commonwealth Bank of Australia recorded its highest annual revenue in four years, in part thanks to an increase in housing loans in the first half of the year.
Additionally, a big improvement in its loan impairment costs helped drive cash income up significantly as the impact of Covid subsided.
And with gloom and doom abounding as the Reserve Bank hikes rates to fight inflation, the ABC thinks this will be a boon for it as it will help boost its net interest margin after a decline. 18 points over the year to June 30.
Australia’s biggest lender said after-tax net cash profit was $9.60 billion for the year to June 30, nearly $1 billion higher than the $8.65 billion dollars earned in 2020-2021.
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 difficult time, but we remain optimistic that we can find a way through these economic conditions,” said Comyn, adding that the medium-term outlook for Australia was positive.
The bank’s net interest margin fell 18 basis points to 1.90% amid fierce competition in home loans and an increase in low-yielding liquid assets.
“The group’s NIM declined due to a sharp increase in low-yielding liquid assets and lower spreads on home loans,” the bank explained in its Wednesday statement.
But that will be a temporary situation, with the ABC predicting that “margins (should) rise in a rising rate environment.”
With the bank keeping a cap on costs in the year through June, the bank’s ‘jaw’ has improved as costs fell faster than revenues rose.
In fact, its cost/income ratio improved to a low 45.9% as of June 30, from 47% in the same period last year.
Operating expenses fell 1.5% on the year – (faster than the 1% rise in revenue), news investors should welcome after taking fright from National Australia’s warning Bank regarding an increase in costs during its 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 to $2.00 last year. That brought the total for the year through June to $3.85 per share with a mid-higher of $1.75 per share ($1.50 previously). This represented a 10% increase in the annual payment to shareholders.
Troubled and impaired assets fell to $6.4 billion at the end of the year, from $7.5 billion last year.
The ABC revealed its loan impairment charge fell $911 million to a profit of $357 million for the year to June ‘due to reduced COVID-19 overlays partially offset through increased forward-looking adjustments for emerging risks, including inflationary pressures, supply chain disruptions and upside. interest rate.”
Rival National Australia Bank reported a 6% rise in profits on Tuesday but warned of costs for the second time in four months.
CBA also confirmed that it wrote down the value of its stake in Swedish buy now pay later group Klarna by $2.3 billion, wiping out a substantial portion of the dynamic value of $2.7 billion set at June 30, 2021.
This value was reduced to $2.48 billion at the end of December 2021, as Klarna’s value declined in the gradual easing of buy now pay later values from companies that like Afterpay (which was bought by Block at the end of 2021 ).
The large write-down was not highlighted anywhere in the ABC’s announcements yesterday regarding its annual results and financial statements. The impairment was disclosed in the ABC’s 2021-2022 Annual Report in the Notes to the Accounts on page 247.
A series of failed capital raises in the six months to June by Klarna saw its market value plummet – it was valued at $46 billion in June 2021, and a capital raise in July brought it down to less than $46 billion. $15 billion, meaning the ABC, which participated in the fundraiser last month, is expected to write off most of the value of its stake.
The ABC now values its stake at A$408 million.
“As of June 30, 2022, the Group had an unlisted investment in Klarna Bank AB (Klarna) measured on a recurring basis at fair value through other comprehensive income of $408 million (June 30, 2021: $2,701 millions of dollars).
“The valuation of the investment as of June 30, 2022 was based on a methodology leveraging data from a private equity capital raise executed by Klarna on July 11, 2022, in which CBA participated. The earnings multiple implied in the price of the capital increase was 4x.
“The valuation as of June 30, 2021 was based on a private equity capital increase on June 10, 2021, in which CBA did not participate, as well as earnings multiples of comparable listed companies and significant unobservable inputs, including adjustments for market volatility and liquidity.
“Comparable listed companies have been included based on their industry, size, stage of development and/or strategy. A revenue multiple was derived for each peer company identified and then discounted for considerations such as illiquidity and differences between the peer companies and Klarna based on company-specific facts and circumstances.
“The range of implied earnings multiples applied by the Group to measure fair value was 29 to 36x. The Group used a revenue multiple of 32x in its valuation as of June 30, 2021.
“The $2,293 million reduction in valuation from June 30, 2021 to June 30, 2022 was driven by changes in the valuation implied by each private equity capital raise, as well as the reduction in earnings multiples of comparable listed companies”.
And the PwC auditors noted in their report:
“We considered the equity investment in Klarna to be a key audit matter due to the financial significance of the movement in fair value during the year. »
Investors took no position on the outcome and the ABC’s comments (they even ignored the lack of any guidance). ABC shares ended down 0.2% at $101.