(Reuters) -Commonwealth Bank of Australia warned on Wednesday that the lagged effect of high interest rates will continue to exert financial strain on households and businesses, as its first-half profit dropped due to tighter margins.
The bank, whose profit still beat expectations, warned that risks to the Australian economy were building as slowing demand and persistent inflation impacted businesses, with geopolitical tensions adding to the uncertainty.
“As cash rate increases have a lagged impact on households and business customers, we expect financial strain to continue in 2024, with an uptick in our arrears and impairments,” CEO Matt Comyn said in a statement.
For the six months ending Dec. 31, Australia’s top lender’s cash profit fell to A$5.02 billion ($3.24 billion) from A$5.18 billion a year ago as intense mortgage competition, and higher expenses due to inflation, squeezed margins.
Despite that, the cash profit came in above a Visible Alpha consensus of A$4.95 billion.
“Our lower cash profit reflects cost inflation and a competitive operating environment,” Comyn added. “Australian households continue to feel pressure in the current environment, with many cutting back to adjust.”
Comyn said in a market briefing after the results that increases in the cost of living were felt by more and more households and businesses, and as a consequence customers had reduced their spending.
Overall household disposable income in Australia fell by about 3.5% last financial year, he said.
Shares of CBA were down 2.4%, with the broader Australian index down 1.2% at open on Wednesday.
“At face value, the print has the markings of a good result – core earnings are a 1% beat, asset quality is benign, capital is strong and the dividend is up YoY despite falling cash earnings. However, we think this glosses over a deteriorating outlook,” Citi analyst Brendan Sproules said in note.
SHARES RALLY
CBA’s shares have jumped more than 20% since November, outshining a 12% rise in the wider market, on the back of investors fleeing China’s battered markets and those switching to equities on expectations of interest rate cuts.
CBA needed to deliver a strong set of first-half results against the backdrop of their share price rally, UBS analyst John Storey said in a note.
“Despite not living up to expectations, CBA delivered $5B in cash NPAT, at a point in time when the bank has endured extreme levels of pricing pressure in mortgages & deposits. If the mortgage market rationalizes, CBA is well placed,” Storey added.
CBA’s net interest income from continuing operations on cash basis slipped 2% to A$11.40 billion as its net interest margin (NIM) – a measure of profitability – declined 11 basis points to 1.99%.
The bank’s common equity tier 1 capital ratio stood at 12.3% as at December-end, slightly above 12.2% as at June-end. It declared an interim dividend of A$2.15 per share, up from A$2.10 last year.
Home loan repayments late for more than 90 days crept up from the prior six months owing to higher interest rates and inflation, although they remained low relative to historical averages, the bank said.
($1 = 1.5504 Australian dollars)
Source: Economy - investing.com
