Commonwealth Bank of Australia warned of risks to its margins amid competition in the mortgage market and rising funding costs as it reported a 9% year-over-year increase in cash net profit for the fiscal first half ended Dec. 31, 2022.
Net interest margin at Australia's biggest bank by assets improved to 2.10% for the fiscal first half from 1.92% in the prior-year period, helping to drive a 19% year-over-year rise in net interest income. The bank said its cash net profit for the period rose year over year to A$5.15 billion from A$4.75 billion, driven by higher net interest income.
"While there has been an improvement in margins as the cash rate increased from emergency levels, margins have not returned to pre-COVID levels," the bank's CEO, Matt Comyn, said during a Feb. 15 earnings call. "We saw margins peak in October on a month-on-month spot basis."
Like many of its global peers, the Reserve Bank of Australia has been raising rates to tamp down inflation. In its most recent decision on Feb. 7, the central bank raised the cash rate target by 25 basis points to 3.35%. It said further hikes will be needed over the months ahead to ensure that inflation returns to target.
"Storm clouds gathering, outlook less certain," UBS analysts said in a note after the earnings announcement. "Our first take is the CBA result is a bit disappointing," they added, noting, however, that the headline numbers are largely in line with consensus.
Funding costs rise
In addition to competition in the home loan market, higher funding costs will crimp margins, Comyn said.
"Funding costs have increased significantly, which is also coincided with escalating price-based offers across the home loan market in Australia and New Zealand," Comyn said. "We believe home loan pricing across the industry is below the cost of capital. On the other hand, this has served to dampen the impact of rising rates on home loan customers."
Inflation has increased costs for mortgage holders and the bank could see "savings buffers being drawn down" for customers at higher risk from rising cash rates. There could be more trouble ahead, "given the changes in the cash rate take time to work through the economy, and the market expects at least two further rate rises," Comyn added.
Commonwealth Bank of Australia posted a home loan impairment expense of A$511 million in the half, compared with a benefit of A$75 million in the prior-year period. The bank said this reflected ongoing inflationary pressures, rising interest rates and supply chain disruptions, and a decline in house prices.
Still, the Australian lender's earnings are expected to remain "robust" over the next two years due to improving interest margins amid rising interest rates, S&P Global Ratings said in a Feb. 15 note.
"The relatively benign economic outlook, low unemployment, and strong household balance sheets should temper the risks to the Australian banking system from rising inflation, geopolitical uncertainties, and low business and consumer confidence," Ratings said.
