After hiking its interest rate by 10 basis points on Monday, Commonwealth Bank of Australia (CBA) reported on Wednesday a 19 per cent increase in profit compared to a year ago. CBA registered a record profit of $3.624 billion for the December half.

The lender, one of the big four, attributed the healthy financial results to a drop in bad debt which offset soft demand for mortgages and increasing funding costs.

However, unlike ANZ and Westpac which cut staff while hiking interest rates, CBA Chief Executive Ian Narev said the bank does not plan to make jobs redundant, reduce its manpower or offshore jobs.

"We don't believe, if we can possibly help it, that offshoring is the right thing to do," CBA Chief Financial Officer David Craig said in a statement.

CBA first half profit, which went up 7 per cent on a cash basis, beat analysts' expectations of $3.5 billion. For the same period 12 months ago, the lender had $3.33 billion profit.

With the higher profit, the bank declared it will pay an interim dividend of $1.37 per share on April 5, up from last year's $1.32.

With its December report, CBA kept its status as one of the most profitable banks not only in Australia but in the world. The bank's 19 per cent rise in profit is significantly higher than National Australia Bank's 7.7 per cent increase. Westpac is slated to report its first quarter update on Thursday and ANZ on Friday.

Despite the record-high profit, CBA pointed out that increased funding cost resulted to a 10 basis points decrease in net interest margins compared to the second half of fiscal 2011, broken down into 6 basis points on wholesale funding costs and 4 basis points on deposit funding costs.

Mr Craig emphasised that offshore funding costs remained at historically high levels and it is next to impossible to predict the direction of movement in funding costs. Mr Narev added that global economy outlook is also unpredictable, which makes it necessary for banks to remain cautious.

Mr Narev pointed out the fundamentals of the Australian economy remain strong and CBA is confident of prospects for the national economy.

"However, in the absence of sustained recovery in offshore economies, particularly Europe, business and consumers will remain cautious, and the current trend of weak credit growth, asset allocation towards cash and volatile markets will continue in Australia," Mr Narev said.

Commenting on the CBA results, Ben Le Brun, market analyst of optionsExpress, said the 19 per cent return on equity is an indicator that "while banks are making huge profits and drawing the ire of politicians for the out of cycle increase in lending rates, they still need an incredibly vast amount of assets to be able to turn a profit."

City Index chief market analyst Peter Esho said the CBA result highlights the strength of the bank's ability to raise money within its core domestic market to fund lending growth. CBA generated 62 per cent of its total funding from customer deposits, up from 60 per cent.

"What happens overseas is important but not life threatening and Australian banks are showing their ability to withstand challenges. The swings and roundabouts seen in other international bank earnings are very different to our own," Mr Esho added.

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