Ouch, didn’t see that slide coming in the wake of the record interim earnings and dividend from the Commonwealth Bank yesterday.
The shares slid more than 5% before lunch yesterday and stayed there to end the day at $103 – a big slump given the quality of the result (perhaps some investors didn’t like the more than half a billion tucked away in bad debt provisions).
But news of a surge in net interest income (thanks to the nine rate rises the CBA has passed on to its borrowers) and a jump in earnings, along with the $1 billion boost to the buyback and higher dividend, were all subsumed by analyst assumptions that the bank’s margins would soon come under pressure.
Some analysts apparently think the slowing economy will hurt the bank – the higher bad debt provision was prudence, not panic – and bank CEO Matt Comyn was confident in predicting that the Australian economy would have a soft landing.
CBA shares led the price of other bank shares lower, all on claims not substantiated by the facts of the results, especially the 20% jump in the interim dividend which was almost three times the size of the 2022 inflation rate.
Westpac shares fell 4.3% to $22.82, Nab shares lost 4.1% at $30.31 and ANZ shares fell 3.7% to $24.78.
The lift in interest rates in the half was always going to help the CBA and so it was with cash earnings growing 9% to a record $5.15 billion.
CBA’s net interest margin rose by 22 (0.22%) basis points compared with the six months to December, 2021, to 2.1% and 18 (0.18%) points compared to the June 30, 2022.
Costs in the half were up just 5%, which is also a lot less than inflation and a lot less than the 12% rise in operating income.
CBA shareholders will receive an interim dividend of $2.10, an increase of 35c or 20%. That’s higher than the pre-Covid peak for an interim dividend.
Mr Comyn said the bank expected slower economic growth this year, but the fundamentals of the economy remained “solid,” pointing to low unemployment, strong exports, and increasing migration.
“We are conscious that many Australian households are feeling significant strain from rising interest rates, alongside the rising costs of electricity, groceries and other household items. Despite this, consumer spend remains resilient, with signs of spend slowing in pockets,” Comyn said.
“We expect business credit growth to moderate and global economic growth to slow during 2023. However, we remain optimistic that a soft landing for the Australian economy can be achieved and positive on the medium-term outlook for Australia.”
CBA’s flagship retail bank posted 16% growth in profits, the business bank’s profits jumped 31%, institutional banking profits fell 23% and its New Zealand arm posted a 6% dip.
Rising interest rates have raised fears that banks may face higher bad debt charges (hence the $586 million lift in provisions) as more customers struggle to meet their repayments, but CBA’s results showed the percentage of consumers falling behind on mortgage or credit card repayments was lower than a year earlier.
The bank increased its provisions for bad debts by $194 million on the prior half, and it said this was mainly in response to ongoing inflationary pressures, rising interest rates, supply chain disruptions and a decline in house prices.
CBA’s balance sheet was strong, with a common equity tier one capital of 12.1% of risk-weighted assets – well above the regulatory minimum of 10.25%.
It said it had completed $1.8 billion of a previously announced $2 billion share buyback in December, and given its surplus capital it would increase the buyback by a further $1 billion.
That will of course help underpin the share price should the analysts’ nervousness about profit and interest margins become real.
