The Commonwealth Bank of Australia (CBA), the country's largest bank, announced a record annual profit on Wednesday, as rising interest rates allowed the bank to charge customers more fees. However, the bank warned that the rising cost of living leads to an increase in debt delinquency, while competition is also squeezing profit margins, meaning the bank needs to sacrifice a portion of its profits.
The bank is an important player in Australia's mortgage market, providing a quarter of the mortgage funding. Initially, the real estate market experienced a boom under the impact of COVID-19 restrictions, followed by a turning point with a 400 basis point interest rate hike. Now, the bank must sacrifice some of its profits to retain customers who are unable to make payments on time.
As of June, the Commonwealth Bank of Australia (CBA) saw a 6% increase in cash profits, reaching 10.16 billion Australian dollars, slightly above analysts' forecasts. However, due to the "continually increasing cost of living pressures and rising interest rates," CBA also increased its provisions by 1.47 billion Australian dollars. The bank stated that, although the repayment rate for loans more than 90 days overdue has slightly increased since December last year, it remains below the long-term average.
Net interest margin is an important financial indicator, showing the profit made by the bank from loan repayments minus the interest expenses paid to depositors. Since December last year, the bank's net interest margin has begun to narrow, meaning the difference between the income from loans minus the interest expenses paid to depositors is decreasing. The bank expects this pressure to continue into 2024, implying that the bank's net interest margin may continue to be squeezed in the coming years, possibly affecting its profit situation.
CEO Matt Comyn stated in a declaration that the lagging impact of rising interest rates on mortgage customers, along with other cost-of-living pressures causing financial distress for more Australians, is leading to potential economic downturn risks accumulating. They have noticed a gradual decrease in consumer demand, with overall economic growth slowing down. Therefore, they are closely monitoring the impact of reduced consumption, especially for the bank's small and medium-sized business customers.
The Commonwealth Bank of Australia (CBA) announced a buyback of 1 billion Australian dollars in shares. Moreover, they also declared a final dividend of 2.40 Australian dollars per share, bringing the total annual dividend to a record 4.50 Australian dollars. These measures aim to boost investor confidence and enhance the bank's share price.
As the second-largest company by market value in Australia, the Commonwealth Bank of Australia (CBA) saw its share price rise by 2% in early morning trading, while the overall market was essentially flat. Analysts point out that although the overall economic outlook is not very optimistic, the bank's exposure to bleak economic risks is relatively limited.
Citibank analysts stated in a client memo that despite an increase in overdue payments from historical lows, the overall credit experience remains good. Some supporting indicators suggest that this will increase the stock's defensiveness in the current environment.
Some of the Commonwealth Bank of Australia (CBA)'s competitors, including the National Australia Bank (NAB), Westpac Banking Corporation (Westpac), and Australia and New Zealand Banking Group (ANZ Group), are expected to release updates on the third quarter this month.
