The Commonwealth Bank has announced a 9 per cent increase in profits, despite a fall in its margins.
Key points:
CBA has posted a statutory net profit of $9.7 billion
The bank will pay a final dividend of $2.10, fully franked
CBA says most of its customers are well placed to afford rising interest rates, but 37 per cent are less than a month ahead on repayments
The bank made a net profit of $9.7 billion over the 2021-22 financial year and its preferred measure of cash profit, which excludes a range of one-offs, rose 11 per cent to $9.6 billion.
The increase in profits came despite a steep fall in net interest margin (NIM) — the gap between the rate the bank pays to borrow money and the rate it lends it out at and its main source of profits.
NIM fell 0.18 percentage points to 1.9 per cent, driven by lower home loan margins in an ultra-low interest rate environment.
Analysts expect the NIM to grow as the recent jump in interest rates is passed on in full to mortgage borrowers but only in part to savers.
The bank made up for falling profit margins on its loans by growing home lending by 7.4 per cent and business lending by 13.6 per cent, although its growth in home lending was slightly below its competitors.
CBA has expressed confidence that its customers will be able to keep up their repayments in the face of rapidly rising interest rates.
It said two-thirds of its customers had direct debits above their minimum required repayments at the current level of interest rates, although this would drop to a quarter if the cash rate rose to CBA’s forecast peak of 2.6 per cent.
The bank also noted that more than a third of its mortgage customers were at least two years ahead in their repayments, with around half at least three months ahead
However, 22 per cent are only paying just on time, while a further 15 per cent are less than one month ahead.
CBA’s economists are tipping home prices to fall at least 15 per cent from peak to trough, largely because rising interest rates are reducing borrowing capacity.
Most households can only borrow about the same amount or less than they could in 2016, while property investors have seen their borrowing capacity cut.
Commonwealth Bank shareholders will receive a final dividend of $2.10 per share, taking the full-year payout from the bank to $3.85.
There is a stark difference in mood in the economy.
Key points:
Consumers are deeply pessimistic, but still spending
Business confidence has improved
However, economists think spending will start to drop as interest rate increases bite
Businesses are enjoying prosperous conditions with high profits and rising confidence, but consumer sentiment has fallen into deeply negative territory.
In fact, the gap between business confidence and the gloomy consumer sentiment is the largest on record.
Despite that, households are still spending money as though they’re optimistic about the future, and it’s complicating the economic outlook.
But economists say it’s likely that rising inflation and uncertainty will soon begin to weigh on spending, and when that tipping point occurs we may see a real slow-down in economic activity.
Many expect that slowdown to occur next year.
Business confidence rises, despite headwinds
The latest monthly surveys on business and consumer confidence were released on Tuesday.
The NAB monthly business survey showed Australian businesses reported very positive conditions last month.
After two days of silence, Commonwealth Bank has finally confirmed it will lift interest rates on its variable mortgages by 0.5 percentage points.
This makes CBA the first of the “big four” banks to pass on the Reserve Bank’s latest rate hike.
The RBA lifted its cash rate target by 0.5 percentage points on Tuesday, taking the new rate to a six-year high of 1.85 per cent.
It was no surprise that the commercial banks would pass on the RBA’s rate increase to their borrowers.
However, the surprising aspect is how uncharacteristically slow the banks have been in making such announcements in the past couple of days.
Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume.
Reserve Bank hikes interest rates for fourth consecutive month(Rhiana Witson)
CBA’s main rivals — Westpac, NAB and ANZ — still haven’t provided any update on their new borrowing rates.
Australia’s fifth-largest lender, Macquarie Bank, was the first bank to lift its rates — within hours of the RBA’s decision on Tuesday.
This was followed on Wednesday by ubank — an NAB subsidiary — announcing it would lift its savings rates by 0.5 percentage points in September.
Delay in being the first mover
“This kind of waiting game is unusual, but not unprecedented,” said Sally Tindall, the research director of RateCity.
“Back in 2010, three of the big four banks took between eight and 10 days to make announcements following the 0.25 percentage point RBA hike on 2 November.”
“The delay could be a worrying sign for savers. It’s possible the banks are still mulling over whether they will pass on the full hike to all their savings customers.”
“However, the big four banks could just be playing a game of chicken to see which one of them moves first.”
CBA increased its the standard variable rates for its borrowers by 0.5 percentage points.
The bank also said it would increase the rate on “select savings products”, meaning it has not passed on the RBA’s full rate hike to all savers.
