Bank's outlook is strong, analysts say
The impact of the Reserve Bank’s interest rate increases on profit margins is expected to be investors’ main focus when Commonwealth Bank reveals its annual profits on Wednesday.
The bank is set to announce a mixed result, with improved margins bolstering second-half cash profit, but asset sales and one-off items possibly driving a 20% to 30% fall in the headline result, The Australian reported.
The bank’s net interest margin for the June quarter could be boosted thanks to the RBA’s rate hikes, which began in May. The major banks passed the full 25-basis-point hike on to borrowers in May, as well as the 50-basis-point hike in June.
Morgan Stanley analyst Richard Wiles predicted a good result and an even better outlook for the bank thanks to robust volume growth, favourable margin trends and sound credit quality, The Australian reported.
“Australian mortgage growth has slowed to about 2.5% half on half in the second half of 2022, but business loan growth is tracking at a double-digit run rate,” Wiles told the publications. “At the half-year result in February, CBA expected ‘only a shallow rate hike cycle’ with a peak cash rate of 1.25%, so it will be interesting to see [if] management’s view on the outlook for loan growth has changed.”
Wiles predicted that higher cash rates and the steeper yield curve would give CBA’s net interest income a $250 million boost in the second half, bolstering margin expansion in the June quarter.
CBA was expected to see even bigger benefits in the first half of the new financial year, with the impact of rate hikes and deposit pricing power “easily” offsetting mortgage competition pressures, The Australian reported.
“If management chooses to disclose the June ‘exit’ margin, or provide guidance for the [first half of the financial year], it should be very strong,” Wiles said. “We’ve upgraded our 2023 margin forecast by four basis points and we now expect expansion of 10 basis points year on year.”
Goldman Sachs analyst Andrew Lyon told The Australian that he expected CBA’s second-half cash earnings from continuing operations to drop by 1% from the previous corresponding period to $4.74 billion. Lyons said that data from the prudential regulator indicated that, in the six months to June, CBA’s lending growth had broadly aligned with the 4.6% increase for the wider banking system.
That was driven by slight underperformance in housing due to a competitive environment, offset by CBA’s much stronger growth than the wider banking system in business lending.
Goldman Sachs said CBA’s asset quality remained strong despite spiking interest rates, rising inflation and supply chain disruptions.