Record low interest rates putting squeeze on banks

An industry-wide margin squeeze has spread to the nation’s biggest home lender, Commonwealth Bank.

After Westpac and ANZ revealed squeezes in their net interest margin in their quarterly updates over the last week, CBA reported a yawning 17-basis-point NIM contraction from 2.09 per cent in the six months to June last year to 1.92 per cent. Picture: AAP

An industry-wide margin crunch has spread to the nation’s biggest home lender, Commonwealth Bank, with no significant relief in sight until an expected Reserve Bank increase in the cash rate in August.

After Westpac and ANZ revealed squeezes in their net interest margin in their quarterly updates over the last week, CBA reported a yawning 17-basis-point NIM contraction from 2.09 per cent in the six months to June last year to 1.92 per cent.

The result was otherwise well-received, with the share price booming $5.56, or 5.9 per cent, to $99.56.

Chief executive Matt Comyn said record low interest rates over the past few years had created a number of challenges, not just for Commonwealth Bank but for banks worldwide.

“It’s clearly been a very challenging environment globally,” he said.

The main downside in the CBA result was the margin outlook, with the market surprised by guidance that its NIM would remain under pressure into the second half.

This was due to competition, and the impact of higher swap rates on fixed-rate home loans.

Also, the share of lower-margin, fixed-rate home loans after strong volumes in the December quarter would peak in the second half, later than expectations of a first-half peak. The outlook improved over the medium term, especially with CBA forecasting a cash rate increase in August.

While the bank’s modelling shows each 25-basis-point rate increase feeds through to a four-basis-point NIM expansion, even that was a disappointment for the market.

Citi analyst Brendan Sproules said CBA’s leverage to rising rates on low-cost deposits looked “very low” compared to his estimates, while in the near term mortgage pressures appeared set to deteriorate further in the second half.

“While investors should receive the core earnings beat positively, with a further $2bn buy­back (announcement), we think that near-term guidance on the NIM will cloud the earnings growth outlook, which is important given CBA’s premium valuation,” Mr Sproules said.

In the second half, CBA said it would also benefit from a decline in the share of fixed-rate loans as interest rates began to normalise.

The higher swap rate would benefit the bank’s $50bn equity hedge.

One of the slides in the bank’s presentation pack showed a 22-basis-point erosion in the bank’s NIM since the first half of 2019.

Of that figure, 15 basis points was due to the significant impact on low-rate deposits of 140 basis points in cash-rate cuts.

With deposit rates already close to zero, banks were unable to offset further cuts in their loan rates by reducing deposit rates.