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.
Businesses said they were enjoying strong trading conditions, high levels of profitability, and more demand for staff.
It pushed business confidence back above its long-term average, and comes despite a steep increase in purchase costs and labor costs.
“How long this can persist before demand begins to fall is a key uncertainty for the economy,” Commonwealth Bank economist Belinda Allen said on Tuesday.
“The bounce in confidence and conditions was somewhat surprising to us given the combined headwinds of high inflation, rising interest rates and depressed consumer sentiment.
Business confidence is back above its long-term average(Source: NAB)
“It is our view that the multitude of headwinds are likely to weigh on economic activity throughout the second half of this year.
“As such, we expect business confidence and conditions to ease as consumers tighten their budgets in what is an increasingly complex and challenging economic environment,” she said.
Diana Mousina, a senior economist at AMP Capital, said businesses had been able to push some of their rising costs onto customers without hurting their profits in recent months, but that situation may not last for much longer.
AMP Capital senior economist Diana Mousina said the underpayment of workers was “clearly a problem.” (ABC News: Billy Cooper)
She said when that point occurred, it could show up in declining business confidence.
“While businesses have so far been able to pass on higher prices to consumers, this can’t last as consumer spending power has been hit from rate rises and high inflation,” she said.
“The monthly confidence surveys showed a divergence between unhappy consumers and upbeat businesses.
“Also, while selling prices have risen, purchase and labor costs are rising faster which indicates some potential margin pressure for firms.
“As consumer spending volumes decline, which is just starting now, business confidence and conditions should also fail.”
AMP Capital senior economist Diana Mousina says rising business costs could soon start to bite(Source: AMP Capital)
Consumer sentiment becomes deeply negative
The Westpac-Melbourne Institute survey of consumer confidence showed households had become deeply pessimistic.
Bill Evans, Westpac chief economist, said the rapid decline in sentiment last month pushed household confidence to levels similar to the lows of COVID and the global financial crisis.
However, he said they were still well above the lows reached in the recession of the early 1990s.
“Since the recent peak in November 2021 the Index has fallen every month for a cumulative decrease of 22.9 per cent,” Mr Evans said.
He said interest rate increases are now weighing noticeably on confidence after the Reserve Bank delivered yet another 0.5 per cent rate increase last week.
consumer feeling (Source: Westpac)
“Respondents holding a mortgage were particularly unnerved by the rate rise,” Mr Evans said.
“Their confidence fell by 8.9 per cent compared to modest moves from tenants (0.2 per cent) and those owners who do not have a mortgage (-2.1 per cent),” he said.
Curiously, economists say households are still spending as though they’re confident about the future and it’s complicating the economic outlook, but they didn’t expect that divergence to last.
“Consumers are feeling abnormally pessimistic at the moment,” said Ms Allen.
“The combination of higher inflation, aggressive interest rate hikes and falling home prices together have contributed to very low levels of sentiment.
“[It] raises the risk that spending growth will slow more materially from here,” she said.
Where to fromhere?
Stephen Wu, an economist from Commonwealth Bank, said consumer confidence and spending typically moved together, so the large gap that had developed between the two was puzzling.
“On one hand, we have seen consumer sentiment decline to very low levels that are consistent with major economic disruptions,” he said.
“But on the other hand, consumption growth was robust in the first quarter of 2022, and looks to have been fairly solid in the June quarter.
Why is spending so strong if confidence is so weak?(Source: CBA)
However, he said data suggested rising uncertainty and inflation were two key factors pushing sentiment lower, and internal CBA data show there’s a clear moderation in spending growth already underway, with spending declining noticeably for discretionary goods in recent months.
“That is consistent with households’ budgets feeling the pinch,” he said.
“We do expect the combination of materially higher mortgage rates, lower home prices, and rising cost of living pressures to put downward pressure on real consumer spending.
“We anticipate softer spending will drive below-trend economic growth over 2023,” he said.
Ms Mousina from AMP Capital agreed.
“The monthly confidence surveys showed a divergence between unhappy consumers and upbeat businesses,” she said.
“The strength in the business survey is unlikely to continue as consumer spending volumes start to weaken and margin pressure accelerates.”
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.
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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.
