Commonwealth Bank (ASX:CBA) shares battered as profit margins tighten

• Shares in Commonwealth Bank (CBA) take a beating after the big bank flags thin loan margins despite an increase in first-quarter profit
• The bank’s unaudited cash profit topped $2.2 billion over the September quarter — 20 per cent higher than the same time last year, but lower than the first two quarters of 2021
• However, fierce competition in the home loan market and low interest rates eroded CBA’s net interest margin, which was “considerably lower” than preceding quarters
• Still, CEO Matt Comyn says the bank’s volume growth, portfolio credit quality, and balance sheet strength is evidence of its sound strategy
• It seems investors were not willing to look past the quarterly profit margins, with CBA shares down 7.09 per cent at 12:31 pm AEDT to just over $100 a share

Shares in Commonwealth Bank (CBA) have taken a beating today after the big bank flagged thin loan margins despite an increase in first-quarter profit.

The bank said unaudited net cash profit topped $2.2 billion over the three months to the end of September — 20 per cent higher than the same time period in 2020 when the bank was hit by COVID-19 loan losses. However, September quarter profits were 9 per cent lower than average profits over the first two quarters of 2021.

CBA said fierce price competition in the home loan market and record-low interest rates eroded its net interest margin, which was “considerably lower” than preceding quarters.

The bank’s interest margin refers to what it charges for loans minus funding costs and other associated expenses.

Margins have fallen across the banking sector, but the impact is particularly pertinent for CBA given its status as Australia’s biggest home lender.

An ongoing low-interest-rate environment as a reaction to COVID-induced economic turmoil is largely to blame for the skinny margins, exacerbated by the fact that many customers are opting for fixed-rate loans while rates remain subdued — a lower-margin product for lenders.

CBA’s non-interest income, which mainly reflects fees, came in 8 per cent lower over the September quarter compared to the first two quarters of the year.

Nevertheless, Commonwealth Bank CEO Matt Comyn highlighted the bank’s volume growth, portfolio credit quality, and balance sheet strength as evidence of its sound strategy.

“Through the first quarter of FY22, our focus has remained on supporting our people, customers and communities as the economy recovers from the impact of COVID-19,” Mr Comyns said.

“Our focus on operational execution ensures we are well placed to provide this support as activity restrictions continue to ease.”

CBA reduced operating expenses by 1 per cent during the September quarter, though the bank said this was mostly driven by remediation costs. Without remediation costs, expenses were up 3 per cent on the preceding two quarters, driven by higher staff costs.

The bank launched a $6 billion share buyback program earlier this year, and Mr Comyn today said following the completion of the buyback, CBA had returned $12 billion to shareholders in the past 12 months.

“More broadly, we continue to make good progress on our strategic agenda, differentiating our customer proposition with reimagined products and services that help us deliver on our purpose to build a brighter future for all,” he said.

Nevertheless, it seems investors were not willing to look past the quarterly profit margins, with CBA shares down 7.09 per cent at 12:31 pm AEDT to just over $100 a share.