Commonwealth Bank of Australia expects the strains on its customers from the delayed effects of monetary policy tightening to continue in 2024, driving up the lender's impairments.
Australia's central bank rapidly increased its benchmark cash rate starting May 2022 to tamp inflation as the world economy exited the COVID-19 pandemic. The effects of the monetary policy tightening are still filtering through the economy. Higher rates have added to households' costs, Commonwealth Bank noted, adding that it sees a buildup of downside risks as slowing demand and persistent inflation impact Australian businesses.
"As cash rate increases have a lagged impact on households and business customers, we expect financial strain to continue in 2024, with an uptick in our arrears and impairments," CEO Matt Comyn said in comments published along with the biggest Australian lender's earnings statement for the July-to-December fiscal first half. "We remain well provisioned and capitalized, with capacity to navigate an uncertain economic environment," Comyn said.
Commonwealth Bank posted a cash net profit of A$5 billion in the fiscal first half of the year, down 3% from the same period a year ago on flat operating income and higher operating expenses. Net interest margin fell by 11 basis points to 1.99% from a year ago, and down 6 basis points from the second half of the fiscal year ended June 30, 2023. The lender attributed the net interest margin decline to increased competition, the movement of customers to higher-yielding deposit accounts and higher funding costs.
Monetary policy tightening
The Reserve Bank of Australia had raised the cash rate target to 4.35% in November 2023. The central bank has maintained status quo on the policy rate in the two following monetary policy meetings since. In its recently concluded meeting on Feb. 6, the central bank said the economy outlook remains uncertain and a "further increase in interest rates cannot be ruled out." Headline inflation in the country is at 4.1%, sharply higher than the central bank's target range of 2%-3%.
Australian households and businesses have scaled back on spending due to rising costs, Comyn said. The lender's home loan growth stood at 2% in the fiscal first half of the year, lower than the 4% industry level, according to the earnings statement. The bank's market share in home loans also fell to 24.5% in the December half from 25.1% a year ago based on Reserve Bank of Australia statistics.
Consumer arrears in home loans and credit cards ticked up as a consequence but remain at historically low levels, reflecting ongoing pressures from higher interest rates and cost of living, the bank said.
Commonwealth Bank of Australia's common equity Tier 1 capital ratio stood at 12.3% as at Dec. 31, 2023, up 10 basis points from June 30, 2023. The bank also declared a fully franked interim dividend of A$2.15 per share, an increase of 5 Australian cents from a year ago.
