Normally the most important dates in the financial calendar are the releases of their six-monthly profit results in February and August, but for Commonwealth Bank shareholders the most important date for 2019 was not the announcement of their earnings this morning, but rather the release of the Hayne Report on Monday afternoon.

After the excitement of Monday night and the phenomenal share price gains seen in the bank shares on Tuesday, today’s financial result from Commonwealth Bank was always going to take a backseat. With the Hayne Report recommending changes that in aggregate will have a minimal financial impact on the major banks, for investors, it is now back to work breaking down financial statements to build a picture of Commonwealth Bank’s future financial prospects.

Our three key takeaways from the report

1: Slowing growth

Over the past year, Commonwealth Bank only grew its loan book by two per cent, an outcome that reflects a period when the major banks were under scrutiny for the lending practices which clearly resulted in tighter lending requirements and greater compliance.

Additionally, on the demand side many potential borrowers after seeing falling house prices were understandably reticent about making a purchase. Interestingly Commonwealth Bank revealed that over 60% of their mortgages were originated in-house rather than via mortgage brokers, a much higher level than their competitors that have had a heavier reliance on mortgage brokers.

2: Bad debts still low

Over the past decade, one of the biggest drivers of profit growth for the banks has been declining bad debts. As loans are priced assuming a certain percentage are unrecoverable and provisions made on the bank’s balance sheet, falling bad debts over an extended period boost earnings.

While there was no sign in this result that bad debts were rising for Commonwealth Bank, the trajectory is likely to be upwards going forward. Management did mention rising provisions in their business bank some of this relating to loans made to RCR Tomlinson.

3: Capital

Commonwealth Bank’s capital position improved over the last six months due to strong organic capital generation. After including asset sold such as Colonial First State Asset Management, the banks Tier 1 ratio would be around 12%, significantly ahead of APRA’s ‘unquestionably strong’ benchmark of 10.5%.

This raises the question of whether the bank will conduct a significant share buy-back to maintain earnings per share, offsetting the impact of profits lost from the divested insurance and asset management businesses.

Commonwealth demonstrates its resilience

The last twelve months have been tough for investors in bank stocks and in particular for CBA shareholders. The prevailing narrative has been a negative one dominated by concerns about the Royal Commission, house prices and exciting fintech companies displacing the banks.

We added to the CBA weight during the Royal Commission and going into the release of the Hayne Report. After analysing the Interim Report released in September, we came to the conclusion that the Report was unlikely to make recommendations to radically damage the bank’s business model, restricting credit and potentially throwing Australia into a recession.

Today’s result shows both the resilience of the CBA’s key profit centre, retail banking services, and management’s ability to respond to the changing environment.

Don't overlook the declining operating expense

A feature of today’s result from Commonwealth Bank that did not receive much attention was the 3.1% decline in operating expenses to $5,289 million.

In an environment of slowing loan growth, cutting expenses is the main area that a bank can look at to grow earnings.  

Over the past century, the major banks have built up branch networks of around 1,000 branches each and a staff headcount between 25,000 and 48,000. In the medium-term, improvements in technology and changes in the way that individuals engage with their bank represent an opportunity to cut into this cost base.