Australia's biggest lender by assets warned of increasing financial stress among borrowers due to higher interest rates, after the same rate increases boosted its full-year net profit.
Commonwealth Bank of Australia (CBA) on Aug. 9 reported that cash profit in the fiscal year ended June 30 rose to A$10.16 billion, up 6% from A$9.60 billion. The bank's net profit beat S&P Capital IQ's full-year GAAP net income consensus mean estimate of A$10.18 billion, with 10 analysts reporting.
While the Australian economy has been resilient in the face of slowing growth, there have been signs of increased financial stress for households and businesses, CBA CEO Matt Comyn warned.
"It has been an increasingly challenging period for our customers, dealing with rising cost of living pressures," Comyn said after the bank announced its full-year results. There are "signs of downside risks building as rising interest rates have a lagged impact on mortgage customers and other cost of living pressures become a financial strain for more Australians," Comyn said.
Stress ahead
Troublesome and impaired assets increased to A$7.1 billion from A$6.4 billion in fiscal 2022, driven by increases in the construction and commercial property sectors, according to CBA's earning statement.
Loan impairment expense increased to A$1.11 billion, which the bank said reflected ongoing cost of living pressures and rising interest rates, and the nonrecurrence of COVID-19-related overlay releases in the prior year. Total impairment provisions increased to A$5.95 billion from A$5.35 billion.
"While we know that there are some customers that are finding the current environment very challenging, we are still seeing only a small number of customers currently falling behind on their repayments," Comyn said. However, he expects an uptick in the number of arrears in the current year.
Borrowers have not yet felt the full impact of the Reserve Bank of Australia's benchmark interest rate increases. The central bank has increased its cash rate to 4.1% from 0.1% in May 2022 to tame inflation.
Interest income boost
CBA's profit was supported by growth in net interest income, which came in at A$23.06 billion, up from A$19.47 billion in the prior-year period.
"CBA's franchise strength should help it sustain sound system-level loan growth and absorb margin pressure," S&P Global Ratings said in an Aug. 9 note. "We expect CBA to maintain strong earnings relative to global and domestic peers."
The bank's net interest margin, a key metric that measures a bank's profitability and growth, was up 17 basis points to 2.07% from 1.90% in fiscal 2022. The bank expects competition, customer deposit switching and higher wholesale funding costs to drag on margins.
Competition in the home loan market has stepped up and has "really weighed on margins across the whole market," the CEO said. CBA's home loans increased to A$565.19 billion in the year ended June 30, up from A$538.12 billion in the prior year. CBA said its market share in the home loans market remained at 25.1%, citing data from the Reserve Bank of Australia.