CBA profits expected to top $5 billion despite margin squeeze

The Commonwealth Bank is tipped to post half-year cash profits of more than $5 billion this week, although analysts are sceptical of its record-high share price amid strong mortgage competition and a squeeze on banks’ profit margins.

The market, which tends to look to major banks’ earnings and commentary as a bellwether for the health of the broader economy, will be closely watching CBA’s results as the country’s biggest bank reports on February 14.

CBA chief executive Matt Comyn will provide an update to the market on the bank’s highly anticipated earnings results on Wednesday.

The consensus is for CBA to clock in a $5.1 billion cash net profit. The bank recorded a $5.15 billion profit for the previous corresponding half-year to the end of 2022, but JP Morgan lead Australian banks analyst Andrew Triggs said this time around there were several headwinds for the company.

“CBA has shown it is not immune to industry-wide cost pressures,” he said, which would probably weigh on the bank’s profit growth, with “competition remaining intense in the mortgage market, to which CBA is heavily exposed.”

While competition for home loans has been intense over the past few years, with banks offering cash backs and ultra-cheap fixed rate loans, CBA has been cautious to preserve its margins especially in the September quarter last year.

Despite this, Triggs said he expected CBA’s net interest margin, a measure of profitability comparing banks’ funding costs with what they charge for loans, to continue falling on the back of a pickup in mortgage growth in its second quarter.

‘We think the board will be wary of lifting the dividend when core earnings are falling.’

Citi head of Australian Banks Research Brendan Sproules

Overall, Triggs said he expected CBA’s net profit to come in at about $4.9 billion, below consensus, although he noted CBA was a leader in its deposits franchise, with a developing business bank which could help insulate its margins.

However, he said CBA’s shares were trading on multiples which were “impossible to justify” given its outlook on returns and modest growth potential.

Shares in CBA are trading at an all-time high, climbing 5.7 per cent in the past year to about $116.2 a share as of Friday.

Citi head of Australian Banks Research Brendan Sproules said he remained wary about bank stocks after their recent strong share price run given possible risks to banks’ earnings this season including higher funding costs and slower volume growth.

He is among the analysts expecting CBA’s profit to crack the $5 billion mark, about 2 per cent ahead of consensus, on the back of better “bad and doubtful debts”.

“While we expect the credit quality environment to deteriorate, we think it will be more benign than what consensus is forecasting,” he said.

However, Sproules said he expected the dividend to be about $2.1 a share, 3 per cent below consensus.

“We think the board will be wary of lifting the dividend when core earnings are falling [and as the bank heads] into a deteriorating credit quality environment,” he said.

Banks are exposed to intense mortgage competition and households struggling with higher interest rates.

On the outlook for the banks, Sproules said he thought it would be very difficult and unlikely that management would be able to present a positive story beyond the thus-far resilient quality of their loans.

Goldman Sachs head of Australia equity research Andrew Lyons said he had a sell rating on CBA, partly because of the risks associated with the bank’s skew towards consumer banking.

“CBA’s consumer banking skew leaves its earnings more exposed to sector-wide headwinds, including intense mortgage and deposit competition, and adverse impacts from households experiencing elevated interest burdens from higher interest rates,” he said.

Banks have been facing pressures on their margins over the past year, with analysts generally agreeing that the industry’s net interest margins had peaked in the first half of 2023.

Lyons also said CBA was facing the same cost pressures affecting the industry more broadly.

“While CBA has historically done a good job in balancing investment and productivity, we do not think it can escape elevated cost pressures in the 2024 financial year given heightened inflation,” he said.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.