Commonwealth Bank of Australia expects its margins to remain pressured amid record-low interest rates even as cash profit rose 23% year over year in the six months ended Dec. 31, 2021.
Cash profit in the fiscal first half of the year was A$4.75 billion, from A$3.87 billion a year ago, which the biggest bank in Australia by assets attributed to faster growth than peers in all core markets and a reduction in remediation expenses. Commonwealth Bank of Australia, or CBA, announced it would buy back shares worth up to A$2 billion and pay a dividend of A$1.75 per share for the period.
"[CBA's results] were solid and in line with our expectations," said Lisa Barrett, an analyst at S&P Global Ratings. "A net release in credit provisions for the period supported the overall result. We consider that CBA's strong retail franchise will continue to sustain its above-system loan and deposit growth." Barrett expects the bank's earnings will "remain robust by international comparison".
Still, the lender's net interest margin was down by 14 basis points to 1.92%, driven by low rates and competition.
"Until there is a rise in cash rates, our margins will remain under pressure. And that is highly likely to be the situation in the second half of the current financial year," CFO Alan Docherty said during the bank's Feb. 9 earnings presentation.
Tailwinds
Australia's central bank announced last week it will cease its bond-buying program on Feb. 10, triggering a rate hike discussion. Winding up the bond-buying program does not imply an impending rate hike, nor a tightening of monetary policy, the Reserve Bank of Australia said Feb. 4. Underlying inflation has reached the midpoint of the central bank's target range for the first time in over seven years amid a faster-than-expected recovery of the local economy, the Reserve Bank of Australia said. It noted that inflationary pressures in Australia are lesser than in some other advanced economies and added it would be patient and stay committed to its inflation target.
The central bank estimates that Australia's economy likely grew 5.0% year-over-year in the second half of 2021 and the government reported in January that unemployment dropped to a 13-year low of 4.2% in December 2021.
CBA doesn't expect the central bank to raise its benchmark cash rate from its record low level of 0.10% until at least August as it seeks to keep the economy supported. "We expect this strong economic momentum to carry through to at least the end of 2023," CEO Matt Comyn said.
The bank said its businesses continued to perform well, delivering above-market growth in home lending, business lending and deposits. CBA's home lending grew 8.5% in the 12 months to December 2021, compared with an aggregate 7.4% gain in the banking system. Business lending grew 13.3% in the same period.
"[CBA] growing faster than market was always going to hurt margins," said Nathan Zaia, an analyst at Morningstar. The pressure on CBA's NIM will likely continue in the second half, but "the bank is in great shape, its performance in home and business lending solid, credit quality sound, balance sheet in good shape, and it continues to use scale to innovate and improve the customer experience," Zaia said.