SYDNEY - Commonwealth Bank of Australia, the nation's second-biggest lender by market value, said profit fell 11 per cent in the second half as business loans soured and earnings at its wealth management unit declined.
Net income dropped to A$2.15 billion ($2.6 billion) in the six months ended June 30, the company said, from A$2.42 billion a year ago. The bank operates ASB in New Zealand.
To counter rising business loan defaults, chief executive Ralph Norris has expanded in the home-lending market with the purchase of HBOS's Bankwest unit and loans from General Electric's Wizard Mortgage. He's also benefited from government guarantees on deposits and debt issues, helping the bank increase its net interest margin by 8 basis points.
"This number is very strong, very credible and very healthy in comparison to any bank you can find in the world," said Prasad Patkar at Platypus Asset Management in Sydney. "If the economy behaves itself, then the bad debt cycle also won't be as bad as it was expected to be."
Commonwealth posted full-year earnings of A$4.72 billion, compared with the median estimate of eight analysts surveyed by Bloomberg for A$4.64 billion. Excluding its acquisition of HBOS's Bankwest unit in December, the bank's earnings in the second half were A$2.35 billion.
Shares rose A$1.39 to A$45.32.
Commonwealth also announced plans to raise at least A$700 million by selling hybrid securities to strengthen its balance sheet. It will pay a second-half dividend of A$1.15 a share, down from A$1.53 a year ago.
Bad debt charges jumped to A$1.44 billion in the second half, up from A$597 million a year ago. They declined from A$1.61 billion in the six months to December 31. The bank took a charge of A$113 million on loans to Bankwest customers.
It also put aside A$3.23 billion for possible future loan losses. Bad debts as a proportion of loans increased to 0.86 per cent, the bank said yesterday.
Commonwealth's Tier 1 Capital Ratio, a measure of financial strength, was at 8.07 per cent at June 30.
"The 2009 financial year has been a challenging one and the outlook remains uncertain," Norris said in a statement. "Overall credit growth in Australia is expected to slow through 2010 and economic conditions are likely to remain challenging."
Institutional banking cash earnings fell 78 per cent from a year ago due to a higher impairment expense, international financial services earnings lost 19 per cent, while cash wealth management earnings dropped 61 per cent. Funds under administration as at June 30 decreased 9 per cent to A$169 billion, Commonwealth said.
Commonwealth's biggest rivals - Westpac Banking, Australia & New Zealand Banking Group and National Australia Bank - posted an average 10 per cent drop in earnings for the six months ended March 31 and predicted defaults will keep piling up into 2010.
Commonwealth's drop follows earnings declines at DBS Group Holdings, Southeast Asia's biggest bank, and Bank of America. DBS last week reported a 15 per cent decline in second-quarter profit. Bank of America said second-quarter profit fell on higher credit-card and home-loan losses.