CBA expects fierce mortgage competition to ease, withdraws cashback offers as margins hurt

CBA expects intense competition in the mortgage market will moderate as it withdraws its $2000 cashback offers while customers struggle with rising cost of living.

Commonwealth Bank expects the intense competition in the home loan market will moderate, with Australia’s biggest bank terminating its generous $2,000 cashback offers on new mortgages as higher home loan sales at lower margins hurt its earnings.

“I think the market will probably stabilise and adjust but I’m sure it’ll remain very competitive. I don’t think that changes overnight,” chief executive Matt Comyn said in an interview after the bank booked a hefty jump in quarterly profit.

“Margins have been compressed before, but that’s tended to be from a very abrupt change in funding costs, post the GFC. But, typically markets adjust to have something that’s a little more normal or long run.”

Mr Comyn was speaking after the bank released a trading update that disappointed analysts, as lower margins cast a shadow on a 10 per cent jump in cash earnings to $2.6bn, for the three months to March 31.

The nation’s largest lender also warned the risk of loan losses was rising as customers struggled to deal with higher costs of living.

The margin compression came as home lending rose 5.2 per cent and business lending jumped 12 per cent, even in a market with “intense” competition. Household deposits rose 6 per cent during the quarter.

“It’s certainly been a relatively, very intense period even if you took that as a sort of two-decade analysis,” Mr Comyn said.

Some analysts described the result as “soft” as they calculated that net interest margins, a key measure of bank profitability, was falling behind expectations for the second half of fiscal 2023.

Citigroup said the result had been “soft”, while Evans and Partners and Goldman Sachs said it was below what was implied by their second half forecasts.

CBA customers were starting to feel the pain of higher interest rates and rising cost of living but Mr Comyn expected the full effect of a wave of refinancings of cheap loans into much more expensive mortgages would only start to show toward the end of the year.

The bank had a “very strong” balance sheet and was well positioned to weather the challenging period ahead, he added.

On the number of mortgage holders having to pay higher rates, Mr Comyn said: “By the time we get around to our full-year results in August we’ll be about between 70 and 75 per cent. I think it will probably take until late this calendar year before we’re getting the full impact.

“And I think it’s a gradual deterioration, I don’t think there’s a sharp deterioration.”

CBA boss Matt Comyn expects the market to “stabilise and adjust but I’m sure it’ll remain very competitive”.

Over the past fortnight, CBA’s smaller peers have also signalled a tougher outlook ahead and said margins had been squeezed by intense competition as their reported their results for the six months to March 31.

CBA’s financial year ends on June 30, while the year end of its smaller rivals is September 30.

Westpac CEO Peter King on Monday said the bank believed pricing in the mortgage market had become unsustainable.

Last month, Bank of Queensland boss Patrick Allaway said the bank would “sit out” the period of irrational competition in home loans.

Atlas Funds Management chief investment officer Hugh Dive said that over the medium to long term banks did not have a real reason to compete in the market, and he therefore also expected the race of the past few months would moderate.

“There’s no incentive to compete below the cost of capital because everybody has the same cost of capital, so that just drives down industry margins,” he said.

“There will be short times where one bank will try to grab market share and competition will get irrational, but over the cycle it will be rational because you effectively have four oligopolists running 75 per cent of loans in Australia. So there is no incentive to do anything too wild for an extended period of time.”

CBA said that “in response to customer, broker and lender feedback”, the bank would no longer offer cashback payments on applications for new or refinanced home loans starting from June 1. The bank is currently offering a $2,000 cashback in new loans.

“The big banks have been at the centre of the refinancing storm over the last 12 months, throwing down competitive new customer discounts and cold hard cash to tempt borrowers to switch,” said Sally Tindall, a director at RateCity.com.au, which tracks rates movements in the home loan market.

“Now they’re looking to take shelter from it.”

CBA said income had been flat in the third quarter compared to the average of the previous two halves, as the impact of lower margins in a quarter with fewer days offset gains in markets trading income.

The bank did not disclose its net interest margin, a profitability measure that gauges what it earns on loans less funding costs.

It said net interest income had fallen 2 per cent from “continued competitive pressures in home loan pricing and customers switching to higher yielding deposits”.

At its interim results in February, CBA was the first bank to foreshadow that strong competition for home loans would lead to shrinking margins earlier than expected.

It said the gauge had peaked in October to print at 2.10 per cent for the first six months of the year.

Evans and Partners director of bank research Azib Khan said he estimated the quarter’s NIM to be 2.05 per cent “at best”, which was lower than the consensus for the second half of fiscal 2023 of 2.11 per cent.

“We therefore expect consensus second-half NIM to be downgraded,” he said.

“With NIM contracting, CBA’s jaws are now neutral (despite strong Markets income) and we see risk of negative jaws going forward,” he added, referring to the difference in income and expense growth.

CBA’s expenses were flat for the quarter, as lower staff costs were partly offset by higher IT and marketing charges. Excluding remediation payments, expenses fell 1 per cent.

Similar to credit quality indicators reported by its peers, consumer arrears and troublesome assets rose slightly, but remained low compared to historical averages.

The bank expected to see “further increases in arrears rates as the full effects of interest rate increases are borne by borrowers in the months ahead.”

CBA will axe its generous $2,000 cashback offers on new mortgages as higher home loan sales at lower margins were hurting earnings. Picture: Sarah Marshall/NCA NewsWire

Troublesome and impaired assets rose to $6.7bn, or 0.47 per cent of total exposures, from $5.54bn in the previous quarter.

The bank booked an impairment expense of $223m, or 0.10 per cent of gross loans, compared to a benefit worth 0.02 per cent of loans that it credited in the same quarter last year.

Credit provisions stood at $5.69bn, or 1.56 per cent of risk weighted assets, with a slight a slight increase in its collective provisions. It booked a $82m charge in individual provisions to reflect higher risks in “single name exposures” in the construction industry.

Goldman Sachs analysts said the “lower-than-expected cash earnings result was due to a combination of lower-than-expected revenues partially offset by lower expenses (albeit somewhat seasonal) and a lower BDD charge.”

The investment bank calculated CBA was running about 3 per cent behind its second-half earnings forecasts.

CBA’s unaudited statutory net profit was $2.6bn for the quarter, up from $2.3bn a year earlier.

The bank’s tier one core capital ratio stood at 12.1 per cent, which means the bank has $8.7bn in surplus capital above the required by the regulator.

“Not much to like here apart from a strong capital position,” Evans and Partners’ Mr Khan added.

CBA shares edged up 0.2 per cent on Tuesday, to $97.34, against a slight fall in the broader sharemarket.