CBA sparks bank share slump amid concerns of margin peak

Investors are debating how much more the country’s banks will benefit from rising interest rates, after the Commonwealth Bank delivered a record $5.15 billion half-year profit but also underlined stiff competition in mortgages.

Shares in banks fell heavily on Wednesday, despite CBA delivering 9 per cent growth in its cash earnings for the six months to December, in line with expectations. The country’s biggest bank also lifted dividends by 20 per cent and flagged a $1 billion share buyback, after the rapid rise in interest rates boosted its bottom line.

CBA chief executive Matt Comyn said the mortgage market was in a period of “extreme change and intense competition”.Credit: Louie Douvis

But although analysts said the result was strong, they worried that CBA’s profit margins – which expanded rapidly in the half – may have peaked late last year amid fierce competition for home loan customers.

CBA shares, which hit record highs earlier in the month, slumped 5.7 per cent to $103, as analysts said the market would need to rein in bullish expectations for further margin growth this year.

Chief executive Matt Comyn said the mortgage market was in a period of “extreme change and intense competition”, as banks scramble for a piece of the boom in refinancing, including by trying to lure customers with cashbacks worth thousands of dollars. He said bank funding costs had increased “quite dramatically”, but this was not being reflected in the pricing of new loans.

“Generally, when a business sees an increase in its costs, there’s a proportionate change in the pricing, but the home loan market has been very competitive over the last six months and in that period that caused some margin headwinds,” Comyn said.

Even including these “headwinds”, CBA and other banks have still reaped the benefits of rapid-fire interest rate rises by lifting their lending rates more than deposit rates. This has caused sharply wider net interest margins (NIM), which compare bank funding costs and lending rates, and are a critical driver of profitability.

CBA’s net interest margin rose by 18 basis points compared with the six months to June, to 2.1 per cent, which it said was caused by rising interest rates.

However, Barrenjoey analyst Jonathan Mott said it was concerning that CBA’s results showed its NIM peaked in October, which he said could lead to analyst downgrades of profit forecasts.

Principal at fund manager Alphinity Andrew Martin said that although CBA had enjoyed a “massive” increase in its margin, there was debate about where the risks lay from here.

“The risk I guess has shifted from maybe there was more upside to margins to maybe there’s more downside to margins,” Martin said. “Perhaps mortgage competition is curtailing the potential upside.”

Portfolio manager at Milford Asset Management Will Curtayne said more mortgage competition would affect all banks, which investors have seen as a winning bet in a rising rate environment.

“Investors are hiding in banks because banks are supposed to keep benefiting from net interest margin expansion, but CBA has basically indicated that they are no longer benefiting from net interest margin expansion,” Curtayne said.

Rising interest rates have also raised fears that banks may face higher bad debt charges as more customers struggle to meet their repayments. But CBA’s home loan arrears – the proportion of borrowers three months or more behind on their repayments – were at record lows.

Comyn said arrears would increase, as the bank has $96 billion in fixed-rate loans that are due to reset at higher interest rates this year, meaning many households had not yet felt the sting of higher rates. Overall, however, he said the bank expected a “soft landing” for the economy.

CBA lifted its interim dividend by 35 cents to $2.10. It said the dividend would be fully franked and paid on or around March 30.

An ongoing risk to banks is the prospect of a fixed-rate mortgage “cliff” this year, as ultra-cheap loans written during the COVID-19 pandemic expire.

CBA has about 250,000 customers on fixed-rate loans that will expire this year, and Comyn said these clients were on average in a slightly stronger financial position than the rest of its book.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.