latest-news-headlines Market Intelligence /marketintelligence/en/news-insights/latest-news-headlines/commonwealth-bank-warns-of-pain-ahead-as-inflation-higher-rates-sting-71630204 content esgSubNav
In This List

Commonwealth Bank warns of pain ahead as inflation, higher rates sting

Blog

Insight Weekly: Bank boards lag on gender parity; future of office in doubt; US LNG exports leap

Blog

Insight Weekly: Job growth faces hurdles; shale firms sit on cash pile; Africa's lithium future

Podcast

Street Talk | Episode 99 - Higher rates punish bond portfolios, weigh on bank M&A

Blog

Insight Weekly: Loan growth picks up; US-China PE deals fall; France faces winter energy crunch


Commonwealth Bank warns of pain ahead as inflation, higher rates sting

Surging prices and the rapid increase in interest rates in Australia will drag on consumer demand, Commonwealth Bank of Australia warned after reporting an 11% year-over-year increase in its full-year net profit.

"We expect consumer demand to moderate as cost of living pressures increase," Commonwealth Bank of Australia CEO Matt Comyn said after reporting a cash net profit of A$9.60 billion for the full year ended June 30, up from A$8.65 billion in the prior-year period.

The Reserve Bank of Australia has increased its cash rate to 1.85% in a series of hikes since May, a reversal in monetary policy after cutting the benchmark rate to 0.1% in November 2020 to support the economy battered by the COVID-19 pandemic. Most analysts expect further rate hikes as most global central banks shift to inflation control. The global economic outlook has turned cloudy, forcing both companies and individuals to tighten their purse strings.

"We're starting to see a reduction in spend across our debit and credit cards on a seasonally adjusted basis, with spend falling more acutely for interest rate-sensitive cohorts such as home buyers," Comyn said, adding that consumer confidence has fallen below levels seen during the 2008 global financial crisis.

The impact of higher interest rates on mortgage customers' cashflows will quadruple by December from what customers experienced in July, the CEO said. "The impact of rising rates will continue to grow to a level approximately equivalent to 1.5% of GDP," Comyn added.

Still, the bank is confident it can navigate the current economic conditions and its medium-term outlook for the Australian economy is positive. The bank will continue to invest in growing its business and in digital initiatives.

Robust finances

"We consider that CBA's earnings will remain robust by international comparison. Over the medium term, CBA's net interest margin is likely to improve on the back of rising interest rates," S&P Global Ratings said in an Aug. 10 note. The bank's stable earnings will continue to be supported by strong lending growth in its businesses and a benign outlook for the Australian economy, Ratings analysts said.

The bank's capital levels are expected to remain strong, Ratings said. "We forecast the bank's risk adjusted capital ratio to remain 10.5%-11% in the next two years," analysts said.

The bank's net interest margin, which measures the difference between what a bank charges as interest from its customers over what it pays them for deposits, fell to 1.90% from 2.08% in the prior year. Commonwealth Bank of Australia attributed the decline to a large increase in low-yielding liquid assets and lower home loan margins and said it expects margins to increase as interest rates rise.

As of June 30, the bank's common equity Tier 1 ratio stood at 11.5%, down from 13.1% in the prior-year period. CFO Alan Docherty said during an earnings call that the bank's common equity Tier 1 ratio was lower "after absorbing a significant capital headwind from interest rate risk in the banking book." The bank has also returned A$13 billion to shareholders through dividends and buybacks.

Commonwealth Bank of Australia is "well placed" to accommodate any changes to the new prudential capital framework, which is effective from Jan. 1, 2023, Docherty said. The new capital framework is meant to align Australian standards with Basel III requirements. "We will continue to hold strong levels of capital above [the Australian Prudential Regulation Authority]'s new minimum requirements in order to remain resilient to potential future stress events. We, therefore, expect to operate with a post dividend CET1 ratio of greater than 11%, except in circumstances where we experience unexpected capital volatility," the CFO added.