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Earnings Preview: Has CBA hit a profit peak?

Commonwealth bank of Australia

Australia’s big four banks’ half-year earnings results will kick off with Commonwealth Bank of Australia (CBA), reporting its 2023 full-year results on 9 August.

The biggest Australian bank’s shares rose about 13% from its March low after a 15% slump following its half-year performance report. The US banking rout sank its shares further in early March before a rebound. Most Australian and New Zealand banks expressed concerns about a slowdown in loan applications in the first half due to the challenging macro environment and fierce competition. Whether the bank can beat earnings expectations and its guidance for the new year will be critical for the Australian banking sector.

2023 first-half review

In the first half of 2023, CBA reported a record half-year profit of $5.15 billion, up 9% from a year ago, as high-interest rates helped grow its net income while home and business lending increased. The bank also lifted its interim dividend to $2.10 fully franked, up 10% annually. Its net interest margin (NIM) came to 2.1%, up 23% from the second half of 2022. The bank was in a strong capital position, with a CET1 ratio of 11.4%. It intended to increase its existing on-market share buy-back by an additional $1 billion on top of the $2 billion previously announced on 31 December 2022.

Despite record earnings, CBA’s shares tumbled following the report as CEO Matt Comyn expected business credit growth to moderate and global economic growth to slow during 2023, suggesting the bank’ s profit margin may have peaked.

Business growing focus

Home and business loans remain focused on gauging Australian banks’ growth trajectory. While most banks reported record profits amid rising interest rates, analysts believe that these major lenders may have hit profit peaks due to macro headwinds. Fierce competition among banks could lead to a slowdown in home loans and deposits, in turn pressuring the profit margin in the second half. CBA’s third-quarter profit rose 10% to $2.6 billion from a year ago, and CEO Matt Comyn expressed concerns about shrinking market shares due to the intense mortgage war. Loan rates and cashback are primary incentive measures that impact profit.

In the March quarter, the bank is seen a steady growth pace in home lending of 5.2% year on year, but household deposits expanded less than the system growth. At the same time, its business lending increased by 12%. However, the net income declined by 2% due to narrowing interest margins. Depositors also switched to higher-yielding options, which squeezed the big four banks’ funding. CBA expects further increases in loan arrears as “the full effects of interest rate increases are borne by borrowers in the months ahead.” 

Second-half 2023 forecast by Bloomberg

Earnings per share: $2.967, +5% annually

Net Income: $4.984 billion

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