CBA surges on profit surprise

A REVENUE surge and a squeeze on costs will drive a bigger-than-expected $2 billion interim cash profit for the Commonwealth Bank, but the nation's biggest lender will reveal a sharp jump in bad debts when it hands down results next week.

The details pushed the bank's shares nearly 10% to end the day up $2.60 at at $29.05.

The bank will also book a $550 million one-off windfall following last year's swoop on BankWest under accounting rules that require assets to be carried at full market values.

CBA outlined details of its profit announcement last night after a board meeting signed off on parts of its accounts. Given the results were shaping up to be more than 20 per cent above expectations, stock exchange rules require the bank disclose the information.

The chief executive, Ralph Norris, warned that operating conditions would "become increasingly challenging", underscoring a downbeat outlook for the banking sector given slowing credit growth and mounting lending losses.

An expected $1.6 billion expense bill for bad debts will be nearly five times the $333 million incurred by the bank during the first half last year, though largely in line with expectations.

While CBA operates the nation's biggest mortgage book, its problems are clustered among business loans. Its most recent warning on lending losses pointed to increased provisioning across several troubled loans, thought to be linked to Centro and Babcock & Brown.

The bank's cash profit of about $2 billion for the six months to the end of December will still be 16 per cent below the first half of last year, but well ahead of analyst expectations of around $1.64 billion.

Cash profit is closely tracked by investors as it strips out one-off items.

CBA's earnings update comes a little over a month after the bank appeared to stumble over disclosure rules when as part of a capital raising it tried to warn a small group of investors about the rising bad debts before the information was made public.

The bank denies it breached stock exchange rules because it did not consider the information materially significant.

Statutory net profit, which includes the BankWest write-up, is expected to exceed $2.5 billion - an increase of around 9 per cent on the same time last year.

Mr Norris said underlying operational performance was "robust" given trading conditions.

"As customers look for stable financial institutions in these uncertain times, growth in deposit and credit demand has been strong," he said.

But the outlook for the bank would be difficult to predict given the challenging environment. Mr Norris said bank remained focused on credit management and cost control.

Analysts said the major banks were gaining market share from smaller rivals and some offshore banks.

Improved retail banking and institutional performance will back a 15 per cent lift in CBA's operating income for the half to around $8 billion.