CBA's loan losses to increase

HAREHOLDERS have expressed dismay over Commonwealth Bank's investments in failed companies including Allco Finance Group and ABC Learning.

At a long annual meeting, Commonwealth Bank chief executive Ralph Norris said loan losses would increase in the coming year.

And the bank would be required to make "significantly higher first-half provisions" because of exposure to investment bank Lehman Brothers and other collapsed companies.

Shareholder activist Stephen Mayne said the decision to invest hundreds of millions in unsecured notes - as part of a $600 million issue by child-care company ABC Learning in June 2007 - was "the biggest debacle in the history of our bank".

Commonwealth Bank will be forced to write down the remaining value of its 4.46 million unsecured notes.

Mr Norris said he was "aggrieved" by the loss, which will add to Commonwealth Bank's losses on loans in the 2008-09 financial year.

However, he said the bank had "delivered strength in uncertain times, with solid profit growth and another record dividend at a time when many of our global peers are reporting substantial losses".

Chairman John Schubert said there would always be some loans that went badly.

"The last 12 months have probably been the most challenging period for financial organisations that we have ever experienced," he said.

Commonwealth Bank's profit after tax rose to $4.79 billion in the year to June 30, an increase of 7% on the previous year. And cash profit, which excludes selected extraordinary items, rose to $4.73 billion.

But during the year, the bank raised interest rates independently of the Reserve Bank, to compensate for an increased cost of wholesale funding.

Since reporting its accounts, Commonwealth Bank has also recorded strong deposit growth, in part because of a "flight to quality" set off by the global credit crisis.

Retail funding, through deposits, accounts for 57% of the bank's funding.

And, despite the purchase of BankWest for $2.1 billion and a subsequent $2 billion institutional placement, the bank has also increased its liquidity position, with $66 billion in liquid assets.

Mr Schubert said the BankWest acquisition was a one-off opportunity that would have been hampered by the Federal Government's recent announcement that it would guarantee bank deposits in Australia.

"We couldn't have done it two days before, and we couldn't have done it one day later," he said.

Commonwealth Bank shares fell $2.10, or 6%, to $33 in a negative market.

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