Australia's Major Banks Face Setback as CBA Reports Profit Decline Amid Rising Interest Rates
In a recent development that has sent ripples through the financial market, Commonwealth Bank of Australia (CBA), along with its counterparts in the banking sector, experienced a notable decrease in their share prices. The dip comes in the wake of CBA, the nation's leading lender, revealing a surprising downturn in cash profit for the latter half of 2023, alongside issuing a caution regarding the potential for further financial strain due to ascending interest rates.
CBA's shares plummeted by 3.1%, while its big four peers – ANZ Group Holdings Ltd, National Australia Bank Ltd, and Westpac Banking Corp – saw their shares fall by 1.2% to 2.1%. This collective downturn led to a 1% drop in the market benchmark, raising concerns among investors and market analysts alike.
For the six months ending December 31, 2023, Australia’s largest lender reported a cash profit decline of 3% to A$5.02 billion ($3.2 billion). Despite the decline being less than anticipated, it underscored the mounting pressures on lending margins due to diminishing household savings in Australia. This phenomenon is largely attributed to the higher interest rates which have been integrated into the economic framework.
The RBA has been proactive in adjusting the interest rates, marked by a cumulative increase of 425 basis points over the past two years, aimed at countering a post-COVID inflation surge. Although inflation has decreased in recent months, it continues to exceed the RBA's 2% annual target, projecting a prolonged period before stabilization is achieved by late 2025 or early 2026.
Matt Comyn, CBA’s Chief Executive, remarked on the profit reduction, primarily attributing it to increased costs and a competitive operating landscape. He also signalled an anticipated rise in arrears and impairments in 2024, indicating ongoing financial challenges for households and business customers.
With credit activity softening in the second half of 2023 due to the higher interest rates and relatively high inflation, CBA and its peers are now navigating a more competitive environment to capture a shrinking credit market share.
The Australian banking sector is bracing itself for potential challenges ahead, as further hikes in interest rates could exacerbate the situation if Australian inflation remains persistent. This, combined with the recent flat quarterly revenue reported by ANZ, which could signal a slowdown in revenue growth, marks a critical juncture for Australia's financial institutions as they prepare to weather continued economic turbulence.
Analyst comment
Negative news. The profit decline and caution on potential financial strain, coupled with the decrease in share prices for major banks, raise concerns in the market. With credit activity softening and a more competitive environment, the Australian banking sector faces challenges. Further interest rate hikes and a possible slowdown in revenue growth add to the uncertainties.
