Commonwealth Bank (ASX: CBA) Nearly Doubles Bad Debts Over Last Year

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Should you be annoyed or relieved that the Commonwealth Bank (ASX: CBA) reported a cash profit increase of 5% yesterday morning? It would be a refreshing result in an otherwise gloomy reporting period for Aussie financials. But the news might not actually be as good as it first looks.

The earnings growth rate was the slowest in four years, according to Bloomberg. You knew it was going to be hard to grow earnings in the middle of a credit crunch. But the more disturbing number is the near doubling of bad debts.

Bad debts rang in at $496 million last year. This year, they came it just under a billion dollars, at $930 million for the fiscal year. Bad debts as a portion of total loans went from 0.14 last year to 0.26 this year. Commonwealth Bank shares are down about two percent as we write.

You can see that bad debts as a percentage of the total loan portfolio are still pretty low. That’s good. But they are rising. That’s not good.

There are some interesting nuggets in the consolidated balance sheet and cash flow statements, though. For instance, banking income grew just eight percent, reflecting the higher cost of wholesale borrowing. Commonwealth Bank made nearly $300 million from the Visa IPO in America. Meanwhile, funds management income was up 23%.

Here’s a thought. If the Federal government lifts the required contribution to Super from 9% to 12% (or even 15%) you can see that funds management income going even higher, can’t you? What a great racket. Free money for the funds management business, courtesy of the Parliament. No performance required!

Funds management fees aside, the banks are still going to have find new ways to make money if demand for loans goes down. With consumer and business confidence low and interest rates still high, the banks will lean on fee income…unless they get into the credit card business more aggressively, as one colleague suggests they might.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. And they grew their mortgage book by 14%! The CBA board is living in an alternate universe.

    Reply
  2. I hope you meant bad debts went from 0.14% to 0.26%. Otherwise I’m in trouble!

    Reply
  3. You’re slipping Dan. You wrote; “Bad debts as a portion of total loans went from 0.14 last year to 0.26 this year.” This could be taken to mean 14% and 26% or 0.14% and 0.26%. So what is it? Your later comment seems to indicate that it might be the sub-one percent figures. Also, your claim, coupled with quoting only two recent figures, can be misinterpreted that youv’e brewed a little bit of a storm in a tea-cup with some statisitical artistry. Perhaps 0.14 to 0.26 is normal periodical variance? Perhaps its a ‘breakout’ as you seem to imply. Quoting the mean and variance, or values of that figure going back 5-10 periods or more would give readers more confidence in what you are implying.

    Reply
  4. Call customers that has a potential : so there is a lower bad debt. And they migth be interested since they would like to expand the business. If there is lower risk, the bank should give the lower interest rate than other customer with more risk. So we can increase income from good customers.

    Reply

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