Commonwealth Bank (ASX:CBA) posts $10b profit, net interest margins to stay down going ahead

• Commonwealth Bank (CBA) posts net profits but lower margins as high-interest rates prove a double-edged sword
• Three-months-overdue home and personal loans are climbing, but the bank says lending conditions remain sound
• However, the bank is forced to sacrifice profit to compete with other banks as consumers normalise shopping around with new enthusiasm
• Savers are also shifting to term deposit accounts, which cost CBA more to manage
• The bank has boosted its dividend and announced a $1 billion share buyback
• CBA shares last traded at $102.21

Commonwealth (CBA) has posted a mixed bag in its latest results, confirming a record profit of more than $10 billion.

However, the bank reported net interest margins (NIMs) were depressed due to higher operating costs and mortgage loan competition.

Net interest margins fell in H2 FY23 compared to H1 as CBA was forced to reduce rates to win new customers, given that consumers shopping around between the banks has now become the norm in the current environment.

This outcome was predicted by Citigroup analysts earlier this week, who released research suggesting CBA investors should brace for an outlook incorporating lower NIMs for at least the next few quarters.

However, this hasn’t stopped the bank from lifting its dividend payout price – and, on top of that, flagging a $1 billion share buyback, which will boost the price of the bank’s equities. This move is likely to assuage any concerned holders.

Looking at loan quality, it’s worth noting that home and personal loans for which repayments are over three months late are on the increase. This could be more of what CBA CEO Matt Comyn meant when he said the bank was operating in a challenging time.

Regardless, the stock – a household name, which is often overlooked as a performance indicator, and Australia’s best-performing bank – has remained resilient.

But for those looking at such a picture, the cracks may be beginning to show in the bank’s latest results, which also serve as a heartbeat monitor of the Australian economy broadly.

Despite an uptick in overdue payments, Mr Comyn said that overall lending integrity “has remained sound” and that the bank is also supported by a strong labour market, ultimately suggesting that Australians have the money to spend and save.

Any shock rise in the unemployment rate could threaten that comfortable perspective.

Also worth noting, savers are using term deposits more than usual, with those deposits up 24 per cent to $102 billion, and actually costing the bank more to manage.

One could also suggest that Mr Comyn is being too rosy – loan impairment costs rose to $1.5 billion for CBA, which the bank highlighted is due to cost of living pressures and rising interest rates.

While those rising interest rates have been a windfall for profits, they are also reducing the overall profit that could otherwise be obtained at the same time – a bit like a see-saw.

Commonwealth shares last traded at $102.21.