CBA shares tumble as mortgage war eats up profits

Major bank loses billions in market value in a single session

CBA shares tumble as mortgage war eats up profits

Commonwealth Bank lost $14.8 billion in market value in a single session after the bank revealed that the price war in the mortgage market was eating into its profits.

Shares in CBA tumbled 8.1% to $98.99 on Wednesday, their lowest level since July, according to a report by The Sydney Morning Herald.

CBA’s first-quarter cash profits rose by a fifth to $2.2 billion in annual terms, the Herald reported. However, that result was well below market expectations. Investors also took note of the bank’s comment that its net interest margin (NIM) – which compares funding costs with what it charges for loans – was “considerably lower.”

Analysts and fund managers said the update demonstrated that CBA was being impacted by the cutthroat competition among banks to attract new customers with cheap mortgages. Mark Nathan, portfolio manager for Regal Funds Management, said the drop in the bank’s margin showed it wasn’t immune from competition – raising questions about the valuation premium placed on its shares.

“CBA has traded at a 50% premium to the rest of the banking market, and without a doubt, it is the quality major bank in the sector,” Nathan told the Herald. “But it may not be 50% better than the others.”

As interest rates have tumbled to record lows, banks have seen their margins squeezed by lenders cutting their interest rates to attract new customers, the Herald reported. The banks have been unable to offset that squeeze by cutting deposit interest rates – as they would under normal conditions – because many customers are already receiving practically nothing on their savings. A spike in fixed-rate loans, which are a lower-margin product for banks, has added to the impact.

Read next: Westpac hikes fixed rates again

Omkar Joshi, portfolio manager at Opal Capital Management, said that the Reserve Bank’s signals that it wouldn’t rush to raise the cash rate suggested that Australian bank margins would continue to shrink, further impacting profitability.

“The cash rate is not going up in a hurry, and it’s pretty clear that margins are going to stay under pressure,” Joshi told the Herald.

The drop in CBA’s margin comes after Westpac revealed that its own NIM had collapsed in the latest half as it slashed prices in an attempt to regain lost market share, the Herald reported.