August 5, 2018 / 11:09 PM / 9 months ago

PREVIEW-Australia's CBA set for first annual profit drop since 2009

* CBA annual cash earnings seen at A$9.1 bln, from continuing ops

* Bank margins seen under pressure from high funding costs

* CBA to report annual results on Aug. 8

By Swati Pandey and Paulina Duran

SYDNEY, Aug 6 (Reuters) - Commonwealth Bank of Australia is set to report a lower annual profit for the first time in almost a decade, with the end of a housing boom and ballooning funding and regulatory costs chipping away at its margins.

The forecast highlights what has been a challenging year for Australia’s biggest lender as it battled hefty penalties for malpractices and a severe blow to its reputation from a public inquiry, or Royal Commission, into financial sector misconduct.

The inquiry, which is halfway through what is to be a year-long process, is expected to hang heavy on CBA’s outlook. While none of Australia’s “Big Four” banks have emerged with their reputations untarnished from it, CBA has so far paid the highest price in terms of compliance costs.

For the year ended June 30, CBA is likely to post cash earnings of A$9.1 billion ($6.70 billion), down 5 percent, according to an average estimate from five analysts polled by Reuters. The last time it posted a weaker profit was in the year to June 2009, according to Thomson Reuters I/B/E/S.

The forecast excludes the life insurance unit CBA sold to AIA Group in 2017.

“We don’t really have very high expectations from CBA. It’s pretty well known there are pressures for the whole industry, not just CBA,” said Omkar Joshi, Sydney-based portfolio manager at Regal Funds Management. “Wherever you look, whether it’s volumes or margins, they are both under pressure.”

CBA is scheduled to report annual results on Aug. 8.

Others among the “Big Four”, Westpac Banking Corp, Australia and New Zealand Banking Group Ltd and National Australia Bank, follow a September-ending calendar and will post their annual results by early November.

Australian banks are not required to file quarterly reports, although NAB will make a quarterly disclosure later this month.

It is expected to report a lower cash profit of A$1.6 billion in the third quarter, on flat revenues and weaker profit margins, Morgan Stanley said. In comparison, its unaudited cash profit last year was A$1.7 billion.

Shares of the big four have shed a total 9 percent over the past year, versus an 8.6 percent jump in the benchmark.

The four have collectively lost more than A$17 billion ($12.51 billion) in market value, hurt by damaging revelations of careless and at times fraudulent lending practices, since the inquiry’s start in February.


And their problems are far from over.

The four banks, which together control about 80 percent of the country’s deposit and home loan markets - making them some of the world’s most profitable banks, are expected to face a net interest margin squeeze of 4-8 basis points in their respective half-year earnings, analysts polled by Reuters estimate.

Short-term funding costs have more than doubled since August 2017, while the pressure to soothe public anger has prevented the lenders from passing on higher costs to customers.

Adding to their woes is slower demand for mortgages.

Data this week shows growth in Australian home loans for investment hit record lows in June, falling for the first time since the global financial crisis.

This could be the start of a protracted housing downturn, market experts say. The slower market is forcing banks, which get 40-60 percent of their revenue from mortgages, to lower lending rates at the cost of their profit margins.

“You’re not going to encourage businesses by lowering rates by a few basis points. There’s a limit to what you can do with business credit,” Regal Funds’ Joshi said.

$1 = 1.3594 Australian dollars Reporting by Swati Pandey and Paulina Duran; Editing by Himani Sarkar

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