Earnings CBA reported statutory net profit of A$9.063 billion (cash earnings of A$9.137 billion) for the full year 2015 (up 5% on the year) which was broadly in-line with market expectations. The result continues to be underpinned by the market leading cost to income ratio (42.8%), stable net interest income (albeit there was some weakness in the net interest margin which can be partially attributed to asset repricing as a result of increased competition and growth in liquid assets) and a 12% increase in other income (an increase in markets sales, trading, hedging and revaluations adjustments were partially offset by lower fees and a derivative adjustment). Home loan growth (within Retail Banking Services) increased by 7% (broadly in-line with system growth) which was predominantly driven by the broker channel. Income from funds management was flat on a reported basis but excluding the recent property transactions income was up 8% and Funds under Administration up 12%. This result is probably the peak in earnings (at least for a few years) on an adjusted earnings per share basis. As a debt or hybrid investor the actual cash earnings to meet obligations is not under any threat and the bank continues to be well managed with productivity and client service being the focus. Capital The full year result was overshadowed by the largely anticipated capital raising. The bank announced a pro-rata renounceable entitlement offer to raise approximately $5 billion in new common equity capital. This initiative was in direct response to APRA’s recent announcement to increase the average risk weights for residential mortgages to 25%. CBA has reported that this new capital will increase all capital ratios by ~1.35%. Our analysis suggests that this is purely neutralising the effect of the increase in risk weights and post implementation of both the proforma common equity Tier 1 ratio is ~9.4% (Tier 1 is 11.35%). Over the period, other capital initiatives of the bank include the 2014 final dividend reinvestment (~20% participation) and interim 2015 (~18% participation). In terms of bank capital instruments, the bank had a busy year issuing $3 billion of additional tier 1 capital (CommBank PERLS VII) while redeeming PERLS V and US Trust Preferred Securities. In Tier 2 the bank issued AUD, EUR and Chinese Renminbi transactions which all contributed to total capital. This increase in capital was offset by a 6% increase in risk weighted assets (RWA) which can predominantly be attributed to model based adjustments on corporate lending and a big increase in IRRBB (interest rate risk). The latter is a volatile number and is closely correlated to interest rate market volatility. In our opinion this figure will continue to increase if and when the Federal Reserve decides to increase interest rates which will in turn increase volatility across all interest rate markets. Overall, capital is strong and well above the 8% minimum CET1 requirement for 2016. However, this change is only the first phase in what we expect to be another significant change in bank capital adequacy requirements going forward. The most recent Basel Committee review on bank capital standards (“Basel IV”) is still in discussion and we have no transparency on what (if anything) APRA will decide to implement. Asset Quality & Provisions The asset quality of CBA remains strong with gross impairment assets as a % of gross loans and acceptances dropping to 0.44% (down 0.11%) for the full year. Loan impairment expense (0.16%) and loans past due date (0.36%) remained fairly flat over the same period. A reduction in individual provisions over the year led to a 5% increase in nominal provisions as impaired assets reduced. Specific provision coverage of ~31% for impaired assets is low but sufficient for the current environment. Collective provisions remained relatively neutral. We see no reason for a significant increase in impaired assets over the coming year but given peer reports of a slight deterioration in asset quality in regional mining areas we expect this is probably the bottom of the cycle and impairments will increase from here. Funding and Liquidity Liquidity and funding conditions have improved significantly over the past few years and the introduction of the Liquidity Coverage Ratio (LCR) on 1 January 2015 means improved transparency for investors. CBA reported an LCR of 120% as at 30 June 2015 (up from 116% as at December 2014). This is based on qualifying liquid assets of A$131 billion (we note that CBA has $66 billion of its liquid assets derived from the RBA’s committed liquidity facility and the reminder qualifying as High Quality Liquid Assets). This ratio increase was driven by a a smaller customer deposit cash outflow which is an obvious target of the group. From a funding perspective customer deposits and short term funding increased 9% and 21% respectively on the year.  During the year the group issued $31 billion in term debt as a % of overall funding this reduced to 51% (from 55%). Outlook The Commonwealth Bank has been the market leader in terms of return on equity for the past few years but going forward it is difficult to see how they could achieve the same sort of result given the capital and regulatory headwinds they are facing. However, there is no doubt that being the leader in technology and efficiency will continue to help the bank even if we think improving cost to income ratios from here will be difficult. Increasing capital requirement will provide additional support to debt and hybrid investors and at a senior debt level could lead to a higher standalone rating (no/less government support).