Commonwealth Bank shares tumble on cautious outlook signal

COMMONWEALTH Bank of Australia shares plunged after the nation’s largest lender set aside more capital due to higher price pressures on consumers and falling home prices.

Despite a rise in profit that met analysts expectations as higher interest rates buttressed margins, chief executive officer Matt Comyn cautioned that consumer headwinds were building. The shares dropped 6.5 per cent as of 1.12 pm in Sydney, trimming this year’s advance to less than 1 per cent. The result was “a bit disappointing,” UBS Group analysts said.

“We are conscious that many Australian households are feeling significant strain from rising interest rates, alongside the rising costs of electricity, groceries and other household items,” Comyn said in a statement on Wednesday (Feb 15). “Despite this, consumer spend remains resilient, with signs of spend slowing in pockets. The fundamentals of the economy remain solid, with low unemployment, strong exports, and returning migration.”

Banks are reaping the benefits of the unprecedented speed of Reserve Bank of Australia rate hikes, which propelled Commonwealth Bank shares to a record high this month. Still, with a slowing housing market and consumers feeling the pinch from elevated mortgage and energy prices, the bank is boosting its capital cushions, a sign of caution as headwinds for the economy grow.

Commonwealth Bank shares were up about 10 per cent over the past year until Tuesday’s close, beating competitors. This result was unlikely to be able to support the recent rally, said UBS analyst John Storey. On Wednesday, the stock tumbled as much as 6.6 per cent, the biggest slide since November 2021.

Cash profit from continuing operations climbed to a record A$5.15 billion (S$4.7 billion) in the six months ended Dec 31. That was in line with the average estimate of A$5.17 billion in a Bloomberg survey of six analysts. The firm also lifted its dividend.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

The results come as pressure is building on the country’s lenders to raise savings rates for bank deposit customers. Australian Treasurer Jim Chalmers asked the consumer watchdog to investigate when retail banks lift rates for savers. The Australian Consumer Competition Commission will need to provide a report on progress of the inquiry by the start of December.

At Commonwealth Bank, Comyn said his firm remained “well provisioned” as customers navigate the higher costs of living and elevated borrowing rates.

“Higher interim cash profits were a result of volume growth and the recovery in our margins as cash rates rise from historic lows,” Comyn said. “The result was further supported by sound portfolio credit quality.”

Storey at UBS said he saw “storm clouds gathering” and a less certain outlook from the Commonwealth Bank results. Other analysts concluded that net interest margins, a key gauge of profitability, showed signs of having peaked earlier than previously expected.

Inflation, Supply Chains

The bank’s loan impairment expense of A$511 million for the six months saw a large jump, “reflecting ongoing inflationary pressures, supply chain disruptions, rising interest rates” and declines in house prices. The overall loan loss rate increased 13 basis points to 11 basis points.

Commonwealth Bank will pay a A$2.10 per share interim dividend and increased its on-market share buyback by A$1 billion. BLOOMBERG