Commonwealth Bank cuts dividend as provisions rise; ASB unit lifts lending

Wednesday 13th May 2009

Commonwealth Bank of Australia, that nation’s No. 2 lender, plans to cut its final dividend by 25% after the value of impaired assets rose to A$3.4 billion in the third quarter from A$2.8 billion three months earlier.

The bank anticipates paying a final dividend of A$1.15 a share, bringing total payments for the year to $2.28, a 14% reduction on its 2008 dividends.

Its third-quarter cash profit was A$1.15 billion, helped by A$30 billion of new consumer and corporate credit. The bank’s impairment expense was A$360 million in the third quarter, it said in a statement.

“Operating conditions remain challenging, with a continuing slowdown in the domestic economy,” said chief executive Ralph Norris. “Rising unemployment and slowing credit demand will have negative implications for the Australian banking sector, particularly for volume growth and loan impairment charges.”

Earnings growth at Australia’s biggest banks is sliding as the economy heads for its first recession in 18 years, increasing loan defaults and sapping demand for consumer and corporate credit.

Still, the lenders have avoided the worst of the global meltdown in banks from toxic assets tied to the US housing market.

Australian banks and their New Zealand subsidiaries have remained resilient, with their systems not “materially exposed” to the offshore credit products considered responsible for the financial crisis,” the Reserve Bank of New Zealand said in its Financial Stability Report, released today.

The global financial sector fell into disarray last year when several large U.S. lenders collapsed, including Lehman Brothers Holdings and Bear Stearns, resulting in a massive bail-out by American taxpayers. As a result, Congress voted in favour of a US$700 billion fund to help build capital in the banks.

Since then, the US government investigated the country’s 19 largest banks’ ability to cope with the worldwide economic slump in its so-called stress tests. It decided 10 banks would require around US$75 billion in extra capital.

Commonwealth’s Tier 1 capital ratio, a key measure of financial health, slipped to 8.33% at the end of the first quarter, from 8.75% at December 31.

Commonwealth Bank’s New Zealand unit, ASB, grew its lending portfolio, with “robust” volumes of rural lending, though the pace of growth slowed.

The lender said ASB “continues to attract strong funding volumes” into its savings and investment products as the collapse of New Zealand finance companies spurs a ‘flight to quality.’

“Deposit price competition remains very intense,” the bank said. “ASB’s loans provisions have increased off a very low base, reflecting higher portfolio arrears.”

Norris said he expects “bumps in the road” going forward. Still, “we feel that global financial markets are no longer in free fall and that some of the measures taken internationally and domestically have been effective in mitigating an otherwise more ominous set of scenarios,” he said.

Businesswire.co.nz

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