CBA results a litmus test on mortgage pressures as record profits tipped
By Millie Muroi
All eyes will be on the country’s biggest bank this week when it reveals its full-year results, providing a snapshot of the state of the economy, bad debts and the extent of any pressure on banks’ margins.
The first of the majors to report this earnings season, Commonwealth Bank will deliver its result on Wednesday. Some analysts expect a record cash profit result.
Commonwealth Bank will report its full-year results on Wednesday.Credit: Bloomberg
Morningstar equity analyst Nathan Zaia is predicting a cash profit of $10.34 billion but says there is likely to be pressure on the bank’s margins.
“I think CBA’s margins will hold up better than its peers because it has the best funding base in terms of customer deposits and transaction accounts,” he said. “But we do expect the margin to be trending lower from where it was in the first half because the level of competition on home loans has been pretty crazy and a lot of people have been refinancing.”
National Australia Bank chief executive Ross McEwan.Credit: Louie Douvis
NAB chief executive Ross McEwan said last Thursday that the industry was in “pretty good shape” but that the economy was getting tighter.
“It feels harder,” he said. “People are struggling with interest rates up, cost of living’s up. Everything’s up.”
Australia was unlikely to go into recession, McEwan said, but banks would need to step up.
“Australia will be OK in my mind,” he said.
“It’s just going to feel slow, and it’s going to feel sluggish for a lot of customers. We’ve just got to get in there and support. When a customer gets into difficulty, we work through how quickly we can get them back on their feet.”
Australian Eagle Asset Management chief investment officer Sean Sequeira said while CBA’s profit would be in focus for many investors, the number would not be important in itself.
“The trends in CBA’s first-half results would suggest they’re heading towards a record cash profit result for the year,” he said. “But the earnings number is not necessarily the be all end all.”
Instead, Sequeira will be looking at the metrics to answer questions including whether net interest expenses are peaking, what a normalisation of bad debt expense might look like and how it will impact the bank’s earnings in the year ahead.
CBA’s results will also offer an insight into Australia’s $5.3 trillion banking sector more broadly.
“CBA is the most efficient bank in terms of return on equity and has the largest market share,” Sequeira said. “If they are having any issues, then other banks’ issues will be a lot greater.”
While Zaia thinks it’s too early for rate increases to fully hit consumers, he said CBA’s results would also signal how households are faring.
“I think the peak in mortgage stress will be in the next six to 12 months when we’ve got the full effect of the higher rates and a lot of the fixed rates rolling off,” he says.
By next month, Zaia expects there to be close to $180 billion in fixed loans rolling off their ultra-low rates, with a further $120 billion between then and next March.
Meanwhile, Citi analyst Brendan Sproules sees CBA’s result setting the tone for the sector. He says while credit growth remains resilient across the sector, household deposits have turned negative, meaning that “deposit costs will likely be further pressured” for banks.
The Reserve Bank’s July meeting minutes noted the household saving rate declined in the March quarter to be below its pre-pandemic average.
Some, including JP Morgan analyst Andrew Triggs, anticipate a soft result as CBA’s net interest margin pressures offset its loan growth.
“We expect the greatest focus to be on the margin outlook,” he said. “CBA reported a headline net interest margin of 2.1 per cent in the first half but the third quarter trading update implied that this had fallen.”
Triggs also expects “some deterioration in credit quality” for CBA across mortgage arrears and corporate troublesome and impaired assets, although he notes the pace of deterioration should be gradual.
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