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CBA, IAG profits hit by property downturn and hailstorm

Glenn Freeman with AAP  |  06 Feb 2019Text size  Decrease  Increase  |  
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Commonwealth Bank (ASX: CBA) and Insurance Australia Group (ASX: IAG) have reported profit declines in the first half of fiscal 2018, down 2 per cent and 9.3 per cent.

Cash profit at Australia's largest bank fell to $4.67 billion in the six months to 31 December, largely on the back of slowing property prices, from $4.87 billion in the previous half.

Volume growth was offset by a lower net interest margin due to the increased cost of funding loans, competition and customers switching from higher-margin investor and interest-only mortgages to cheaper owner-occupier and principal and interest loans.

Customers have been switching as banks tighten lending standards and raise the cost of riskier loans in response to regulatory intervention and the harsh light of the financial services royal commission.

"The housing market transition is a rational outcome of the lending policy changes introduced over a number of years, especially following an extended period of outpaced growth in some markets," chief executive Matt Comyn said.

Risk, compliance and remediation costs jumped to $221 million from $100 million a year earlier, although total expenses dropped 3.1 per cent due to the AUSTRAC money-laundering penalty and other costs occurring in the prior corresponding period.

Comyn cited the royal commission final report, noting "there is much work ahead" to implement the changes recommended by commissioner Kenneth Hayne. "We are already making the necessary changes and will be a better bank as a result," he said.

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Mr Comyn took on the CEO role when the AUSTRAC scandal led to Ian Narev's retirement.

storm

A hailstorm that hit Sydney ahead of Christmas blew out IAG's net natural claims allowance

Hailstorm dents IAG balance sheet

Insurance Australia Group revealed the freak hailstorm that hit Sydney in December also put a $50 million dent in the insurer's balance sheet, contributing to a 9.3 per cent fall in half year profit, which fell to $500 million.

Net natural peril claims of $110 million for the period exceeded the company's allowance, management said, mainly due to the hailstorm that smashed car windscreens, dented panels and damaged houses across Sydney and the NSW central coast before Christmas.

Insurance profit was down 33 per cent to $496 million, while cash earnings fell 49 per cent to $319 million, for the six months to 31 December.

The company declared a fully franked interim dividend of 12 cents a share, down two cents from a year ago.

In its release to the ASX, IAG said adverse peril, reserve release and credit spread movements, totalling $262 million, had masked an improvement in underlying performance.

"A decreased reported insurance margin of 13.7 per cent primarily reflecting an adverse net natural peril claim cost outcome, which was $110 million above the related allowance largely driven by the December 2018 Sydney hailstorm event," the company said.

IAG also booked a $15 million increase in regulatory and compliance costs from the financial services royal commission and the APRA-requested risk governance self-assessment.
IAG's revenue for the six months to 31 December grew 6.7 per cent to $8.58 billion, from $8.04 billion in prior corresponding period, gross written premiums was up 4.1 per cent at $5.88 billion, while IAG's underlying margin - the company's preferred measure of performance - rose 16.2 per cent.

IAG's GWP growth guidance for the current financial year has been maintained at 2 to 4 per cent.

"Ongoing growth is expected in the second half of the current financial year, but at a slightly more subdued pace than that seen in the current half year," management said.

IAG shares were last trading at $7.30, down from an historic high of $8.62 in June, and up from $7.17 a year ago.

. Glenn Freeman is senior editor, Morningstar Australia.

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