CBA lifts dividend as profits rise by 11 per cent to $9.6 billion

At the same time, investors expect rising interest rates to ultimately widen banks’ profit margins, as lenders raise rates on loans more steeply than on deposits.

CBA’s net interest margin, which compares funding costs with what it charges for loans, contracted by 18 basis points to 1.90 per cent. The bank said this was because of customers switching to less profitable fixed-rate loans, strong competition in mortgage lending and an increase in CBA’s low-yielding liquid assets.

Even so, CBA reiterated its medium-term outlook for increasing margins as interest rates rose.

Another key concern for investors is how the bank’s loan portfolio is affected by rising rates and inflation, but CBA’s results showed the number of borrowers in financial stress had actually decreased.

Its expenses for soured loans fell sharply as it cut back on provisions it had made for the pandemic, with impairments producing a $357 million benefit for the bank’s profit. CBA said the proportion of customers falling behind on home loan repayments fell to 0.49 per cent, from 0.64 per cent last year, helped by low unemployment and households’ hefty savings buffers.

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Morningstar analyst Nathan Zaia said the result was generally in line with his expectations, though it was too early to say how the bank’s loan portfolio was being affected by rising interest rates. Zaia said bad debts were likely to rise, but CBA was entering the environment of rising interest rates with households in a stronger position than previous cycles.

“We’re not expecting any huge increase [in bad debts]. It’s more likely we get a return to more normalised loss rates,” Zaia said.

Comyn highlighted the bank’s strong balance sheet was a highlight as the lender reported common equity tier 1 capital of 11.5 per cent of risk-weighted assets, which is higher than the 10.5 per cent required by regulators.

In June, CBA economists predicted peak-to-trough declines in Sydney and Melbourne house prices of 18 per cent, in response to aggressive interest rate hikes from the Reserve Bank.

CBA’s net interest income rose 1 per cent and fee income was also up 1 per cent, while operating costs fell 1.5 per cent because of lower compensation costs and a fall in its occupancy costs.

More to come

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