Commonwealth Bank profit rises but margins shrink as costs climb and shares tumble

Commonwealth Bank said its costs rose over the September quarter and profit margins slipped at the same time as it posted strong growth in new customer accounts and home loans.

For the quarter ending September 30, Australia’s largest bank posted a cash net profit of $2.6 billion, up two per cent versus the prior corresponding quarter.

Shares slumped 4.6 per cent to $166.89 near lunchtime, as traders fretted over chief executive Matt Comyn’s warning that the bank’s profit margins faced pressure in a lower interest rate environment over the quarter.

“The market really doesn’t like the result,” said Tony Sycamore, an analyst at IG Markets. “The chief executive spoke about a net interest (profit) margin contraction, but didn’t specify how much. He also talked about cost pressures and competitive intensity.”

Mr Sycamore added that the bank’s shares are still expensive on traditional valuation metrics such as price-to-earnings multiples, to means investors may be taking profits after a strong multi-year bull run.

“The earnings growth isn’t really there either,” said Mr Sycamore.

Broker Citi said the cash profit was perhaps a “touch below” the market’s expectations, and also pointed to Mr Comyn’s warning that the bank’s underlying profit margin was ‘slightly lower’ due to deposit switching, mortgage competition, and the lower cash rate.

Mixed result

Over the quarter, wage inflation and tech investments pushed the CB’s total operating expenses four per cent higher to around $3.3 billion. While the bank added more than 175,000 new retail customers in the quarter, primarily driven by new bank account openings. Total household cash deposits in checking or savings accounts grew by $17.8 billion or 1.2 times the system average, over the quarter.

Elsewhere, total home loan volume grew $9.3 billion or 1.1 times the market average for the three months to September 30, with 68 per cent of new loans originated by in-house brokers.

“All the banks now are following in CBA’s footsteps and in-sourcing mortgage business,” said Richard Hemming, a professional analyst at Under the Radar stock report. “And you have to think mortgage competition is going to get tougher because of this.”

Living costs rise

Mr Comyn painted an upbeat picture about the local economy, although he acknowledged many Australians are still struggling with rising living costs.

“The Australian economy remains resilient,” he said.

“Economic growth is recovering, and disposable income is rising for many households. We remain focused on supporting our customers, disciplined execution of our strategy, investing in technology to deliver exceptional customer experiences and delivering strong financial outcomes for our shareholders.”

The bank said it paid $4.4 billion in dividends over the quarter to its 800,000 strong shareholder base.

The stock’s valuation has soared 139 per cent over the past five years, although Citi has a sell rating and $130 share price target.