CBA boosts profit to $9.7bn, says most customers can handle rising interest rates

Commonwealth Bank announced a 9% rise in profits, despite a drop in margins.

The bank posted net income of $9.7 billion in fiscal 2021-22 and its preferred measure of cash profit, which excludes a range of one-time items, rose 11% to 9, $6 billion.

The rise in profits came despite a sharp decline in the net interest margin (NIM) – the difference between the rate the bank pays to borrow money and the rate at which it lends it, which is its main source of profit.

The NIM fell 0.18 percentage points to 1.9%, due to lower spreads on home loans in an ultra-low interest rate environment.

Analysts expect the NIM to rise as the recent rise in interest rates is fully passed on to mortgage borrowers, but only partly to savers.

The bank offset lower profit margins on its loans by increasing home loans by 7.4% and business loans by 13.6%, although its growth in home loans was slightly lower than that of its competitors.

Economic ‘contraction’ but no ‘recession’, warns ABC boss

CBA Chief Executive Matt Comyn told ABC’s The World Today that the bank’s data shows household spending began to decline when interest rates began to rise.

Commonwealth Bank chief executive Matt Comyn said an economic contraction, but not a recession, is likely over the next few months.(John Gunn, ABC News.)

“It’s pretty soon after the immediate rate hike, [but] we are already seeing a drop in customer spending, both from a debit and credit perspective,” he said.

“Of course, this is more pronounced with customers who have a home loan, and we expect this to continue throughout the calendar year.”

Mr Comyn said he expected lower household spending to be enough to shrink the economy later this year.

“These cash rate increases are going to have, and will continue to have, a pretty pronounced effect on the economy,” he said.

“We believe this will lead to a contraction over the rest of the year.”

He added that the CBA did not expect Australia to fall into recession, often defined as two consecutive quarters of economic contraction.

“There’s definitely a risk of that happening if inflation isn’t brought under control fast enough,” he said.

“We are looking for the first signs of stress. We are not seeing it yet.”

However, the Commonwealth Bank boss is less optimistic about the global economic outlook.

“We see the Australian economy in a much better position,” he said.

“We expect recessions in the US, UK and Europe. We don’t think that’s the likely outcome in Australia.”

Borrowers generally “very well placed”

CBA expressed confidence that its customers will be able to maintain their repayments in the face of rapidly rising interest rates and a slowing economy.

Mr Comyn said most of the bank’s customers are “very well placed”.

“The economy is in a very strong position with full employment, in particular, but we recognize that this uncertainty and the rising rate environment is putting additional pressure on our clients.”

The ABC said two-thirds of its customers had direct debits above their required minimum repayments at the current level of interest rates, although that would drop to a quarter if the cash rate hit the peak predicted by the ABC of 2.6%.

The bank also noted that more than a third of its mortgage customers were at least two years ahead of their repayments, with about half at least three months ahead.

However, 22 percent only pay just in time, while another 15 percent are less than a month in advance.

CBA economists predict home prices will fall at least 15% from peak to trough, largely because rising interest rates reduce borrowing capacity.

Most households can only borrow roughly the same amount or less than in 2016, while property investors have seen their ability to borrow reduced.

Commonwealth Bank shareholders will receive a final dividend of $2.10 per share, bringing the bank’s annual payout to $3.85.

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