Pressure builds on CBA
COMMONWEALTH Bank shares were under pressure on Wednesday – despite a jump in the bank’s first-quarter profit – after a warning that low interest rates and fierce mortgage competition were causing “considerably lower” loan margins.
CBA’s unaudited cash profit climbed 22 per cent to $2.2bn for the three months to September 30 from $1.8bn in the same quarter last year, which was affected by amounts set aside for Covid-19 loan losses.
Cash profit in CBA’s first quarter declined 9 per cent versus the average of the preceding two quarters, the bank said in an ASX statement Wednesday.
Quarterly income was 3 per cent higher than the same quarter a year ago, although 1 per cent lower than the quarterly average of the six months prior as CBA divested its Aussie Home Loans mortgage broking unit. Home and business lending grew at 1.2 times and 1.5 times average industry rates in the three months ended September 30.
The nation’s biggest home lender saw mortgage growth amount to $10.1bn in the quarter, household deposits were up $20.4bn while business loans expanded by $3.1bn on “stable margins”.
The bank said the net interest margin – what it earns on loans minus funding and other costs – was “considerably lower” in the first quarter of the fiscal year, impacted by switching to fixed rate mortgages, low interest rates, intense competition for home loan customers and the holding of higher liquid asset balances.
In CBA’s 2021 financial year, its net interest margin was 2.03 per cent, and it printed at 2.04 per cent for the latter half of that financial year.
Velocity Trade analyst Brett Le Mesurier estimated CBA’s net interest margin had declined markedly to 1.90 per cent in the first quarter.
“They’re contributing to poor (pricing and margin) outcomes for everyone by their actions,” he said of CBA’s quarterly results and margin decline. But Mr Le Mesurier does see the pressures starting to ease as banks raise fixed mortgage interest rates to reflect movements in bond markets.
“These pressures will abate because rising interest rates will increase the investment income on shareholder funds and lead to a reassessment of low fixed rate loans that have been offered. Such loans have probably had a material and adverse impact on net interest margin,” he said.
JPMorgan analysts said the quarterly CBA trading update was “much weaker” than they had anticipated.
“We see likely material downgrades to pre-provision profit forecasts, reflecting heightened margin pressures, lower non-interest income, and higher cost growth,” they outlined in a note to clients.
Jarden analysts said the CBA update showed the bank was caught up in home loan discounting pressures and estimated CBA’s core net interest margins, excluding liquid assets, were sitting about 1.96 per cent.
“While CBA’s strong franchise and proprietary network have continued to see above system growth across all core businesses, they are clearly not immune to NIM (net interest margin) pressures impacting the sector,” the analysts said.