CBA’s impossible profit juggle makes no one happy

Commonwealth Bank boss Matt Comyn must have been limbering up to prevent a hamstring injury in the lead-up to Wednesday’s valiant attempt to do the profit splits. He needed to convince investors the bank’s profit performance justified its inflated share price while conveying to politicians and customers that the bank was not over-earning.

The degree of difficulty in his manoeuvre was at the top end of the gymnastics scale.

Comyn is in a particularly difficult position because there are those who believe the big four banks operate in a competition-free zone and who subscribe to the view that a profit of $5 billion (which is what CBA made in the first half of 2024) automatically means they are over-earning.

That’s not a battle that either Comyn or the other three large banks can ever win.

CBA boss Matt Comyn runs a strong business whose ownership is strongly populated by retail investors. But without strong credit growth, its current share price strength is hard to fathom.
CBA boss Matt Comyn runs a strong business whose ownership is strongly populated by retail investors. But without strong credit growth, its current share price strength is hard to fathom.Credit: Dominic Lorrimer

And over the past few weeks it has only become harder for banks to argue their corporate good citizen bona fides. Bank detractors have been emboldened by former Australian Competition and Consumer Commission chair Allan Fels’ criticism of the banking sector in his recent ACTU-commissioned report titled Price Gouging and Unfair Pricing Strategies.

Comyn attempted to push home his point using international comparisons that showed Australian banks have passed on more of the higher deposit rates to customers than overseas banks, and are in the middle of the pack of international peers for passing on rate hikes to customers.

On the other side of the divide are investors and analysts.

The share price fall following the release of CBA’s result suggested Comyn hadn’t produced the profit the market had hoped for, or more specifically, a profit that would justify the share price premium that CBA enjoys relative to its Australian peers.

For Comyn, it was an opportunity to be judged on his bank’s decision to take a back seat in the mortgage competition wars that have been raging for a year.

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CBA sacrificed some market share in mortgages and retail deposits, but importantly, managed to increase its share of net interest income and its share of interest income on home loans.

And there was no suggestion in Comyn’s commentary that the bank was about to seriously jump into the competition fray any time soon.

Its scale – as the largest bank in the market and the one that derives a bigger slice of its funding from deposits – gives it some natural advantage in that it doesn’t need to borrow as much from expensive wholesale markets.

For many months Comyn has argued that mortgage discounting has been damaging lenders and that some lenders have been writing unprofitable loans.

This mortgage discounting has eased a little in recent months, but the new pricing war is in deposits – and it was a big contributor to the six basis-point compression of CBA’s net interest margin. (Bank profits improve as net interest margins grow.)

Given the market conditions CBA’s 3 per cent profit slide was not a bad outcome. It was broadly in line with market expectations.

But to justify its elevated share price it needed to do more.

Not even an increased dividend was enough.

Sure, the CBA is a well run bank in a market-leading position, but with interest rates expected to fall by the end of this year, the prospects of improving profitability in the short term remain slim.

In general bank profits improve as interest rates rise.

But during the most recent interest rate hiking cycle the honeymoon period was uncharacteristically short. Lenders attempted to defend their patch while borrowers rolled off fixed rates to variable rates.

Meanwhile the big four bank bosses would have felt a collective stomach knot on Tuesday when challenger bank Macquarie declared it wants a bigger slice of the retail banking pie.

Backed by its parent, Macquarie Group, the retail bank division’s aggressive growth has been a thorn in the side of the big banks.

For bank shareholders there is little to get excited about in the near to medium term.

Nor is Comyn talking anything up.

He noted that 2023 was increasingly challenging for many of CBA’s customers to absorb the cost-of-living pressures, adding that while the employment market and the economy have been resilient, the downside risks are building as slowing demand and persistent inflation impact Australian businesses.

And he expects the financial strain to continue in 2024 with an uptick in arrears and impairments.

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Source: Thanks smh.com