Introduction

Commonwealth Bank of Australia, the largest bank by market value in Australia, has announced an 8% decrease in its half-year net profit. The decline can be attributed to higher operating expenses and intense competitive pressures. Additionally, the bank has issued a warning about an expected increase in loan arrears in the year 2024.

Financial Performance

For the six-month period ending in December, Commonwealth Bank reported a net profit of AUD 4.76 billion (USD 3.07 billion). While this represents a significant decline, it surpasses the consensus estimate of AUD 4.92 billion from a FactSet-compiled poll of analysts. The bank's half-year cash earnings, which exclude certain items like hedging and losses or gains on acquisitions and asset sales, also fell by 3% to reach AUD 5.02 billion.

Revenue and Expenses

During the same period, Commonwealth Bank experienced a drop in half-year revenue of 3% to AUD 13.58 billion. On the other hand, operating expenses increased by 4% to reach AUD 6.01 billion. The bank attributes this rise in expenses to inflation and additional technology investments, although some of it was offset by productivity initiatives.

Performance Across Units

Commonwealth Bank witnessed mixed results across its different business units. Cash earnings from retail banking services decreased by 7% to AUD 2.69 billion, primarily due to a decline in operating income and an increase in operating expenses. However, cash earnings from business banking increased by 6% to AUD 1.90 billion, and earnings from institutional banking and markets rose by 28% to AUD 589 million.

Loan Arrears and Impairments

Chief Executive Matt Comyn expressed concerns about the impact of rising interest rates on households and business customers. He expects financial strain to persist in 2024, potentially leading to an uptick in loan arrears and impairments.

Net Interest Margin

Commonwealth Bank's net interest margin, which represents the difference between the cost of deposits and funds and the interest charged by the bank, declined by 11 basis points compared to the previous year. The margin now stands at 1.99%.

Australian Banks Navigate Challenges in a Competitive Market

Despite benefiting from interest rate hikes, Australian banks are facing intense competition in the home loans and customer deposits sector, which has put pressure on their margins. Commonwealth Bank, for instance, has stepped back from the mortgage market, resulting in a loss of market share. However, recent regulator data indicates that the bank is actively working to expand its home loan portfolio.

The decline in the bank's net interest margin during the first half of the year can be partly attributed to increased competition, customers shifting to higher yielding deposits, and rising wholesale funding costs. Despite these challenges, Commonwealth Bank reported that consumer arrears have historically remained low, indicating ongoing pressures from higher interest rates and living expenses. Additionally, personal loans have decreased, reflecting enhancements in origination quality.

Furthermore, troublesome and impaired assets decreased from A$7.1 billion to A$6.9 billion at the end of June. The bank's loan impairment expense for the first half was A$415 million, a decrease of A$96 million compared to the previous year. This decline was mainly driven by lower collective provision charges, indicating the bank's ongoing portfolio resilience.

While the Australian economy has demonstrated resilience, supported by a robust labor market, savings and repayment buffers, population growth, and favorable commodity prices, Commonwealth Bank anticipates potential downside risks. Slowing demand and persistent inflation could impact Australian businesses, and ongoing geopolitical tensions add further uncertainty.

On a positive note, the company's directors have declared an interim dividend of A$2.15 per share, reflecting an increase from A$2.10 in the previous year. Additionally, Commonwealth Bank's Common Equity Tier 1 capital ratio remains strong at 12.3%, well above regulatory minimum requirements.