Commonwealth Bank of Australia Ltd says an end is in sight to subdued business lending and higher funding costs, after posting a first half cash profit of $3.335 billion.
Chief executive Ralph Norris initially said he was "cautiously optimistic" about the remainder of the financial year, but later commentary featured his most upbeat economic assessments for some time.
Australia's largest lender reported net profit of $3.052 billion for the six months to December 31, up five per cent on $2.914 billion in the prior corresponding period.
Cash profit, the bank's preferred measure, was up 13 per cent on the previous corresponding period to $3.335 billion.
Consensus analyst forecasts were for a $3.171 billion net profit and a $3.222 billion cash profit.
Investors were pleased with the result, sending CBA shares up $1.15, or 2.13 per cent per cent, to $55.07.
Mr Norris described the political climate in the banking sector as "sensitive", and saw fit to defend the profit figure.
"Yes, we are a profitable organisation, but not excessively so," he said.
The first half profit rise was due primarily to continuing falls in bad debt provisions, down from $1.383 billion in the previous corresponding period to $722 million in the six months to December.
The provision includes a $100 million overlay relating to flooding in Queensland during December.
All CBA divisions with the exception of institutional banking and markets increased their cash profits from the previous corresponding period. The average first half net interest margin was 212 basis points, down six basis points on the previous corresponding period but up four basis points on the second half of fiscal 2010.
Despite the political backlash that followed the bank's lifting of mortgage interest rates by 45 basis points in November - almost double the official central bank rate increase - December was CBA's strongest month for home loan applications in 2010, Mr Norris said.
"While this has clearly had an impact on our customers, this was absolutely the right decision in the context of sustained elevated funding costs that have been, and continue to be, faced across the industry," he said.
Wholesale funding costs are likely to continue to rise for another 12 months, but at a slower pace than they have been, Mr Norris said.
"We're looking at somewhere around one and a half basis points a month on average, so that's probably somewhere around nine or 10 potentially over the next six month period," he said.
Business lending remains subdued, but Mr Norris said he expected credit demand to return in six to 12 months.
Floods and cyclones in Queensland will further damage business and consumer confidence in the short term, but could provide the impetus needed for investment later in the calendar year, he said.
Morningstar Equities analyst David Walker said lower impairment charges were in line with expectations, but the performance of some of CBA's divisions were among the positives in the first half result.
"There was a marked improvement in management's confidence in the outlook, which while still cautious was the most optimistic I have seen from CBA for a while," Mr Walker said.
The retail banking division increased cash profit by 12 per cent despite the impact of deposit competition on margins, with home loan volumes up by eight per cent.
The bank's Tier 1 capital ratio rose by 56 basis points to 9.71 per cent from six months earlier.
CBA's interim dividend of $1.32 per share was up 10 per cent from the same time last year.
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