Commonwealth Bank Faces Margin Squeeze Amidst Intensified Competition

Commonwealth Bank (ASX: CBA), Australia's largest bank, experienced a further squeeze on its profit margin in the last quarter, citing heightened competition for deposits as a key emerging pressure. The impact of this intensified competition is evident in the bank's lower net interest margins, primarily attributed to customers switching to higher-yielding deposits. While home lending margins stabilized, the aggressive competition in deposits has taken a toll on CBA's profitability.

Economic Impact of Higher Rates

CBA's CEO, Matt Comyn, highlighted the economic repercussions of higher interest rates, noting a slowdown in economic growth and consumer spending. The unaudited cash profit for the three months ending September 30 reached AU$2.5 billion, remaining flat compared to the second half's quarterly average and showing a modest 1% increase from the same quarter last year.

Shifting Customer Behavior

The bank reported a notable shift in customer behavior, with more opting for term deposits to capitalize on higher interest rates. While CBA managed to grow household deposits by 5.7% (equivalent to AU$10 billion) during the quarter, this figure was only 0.8 times the system's average.

Peaked Profits Amidst Economic Shifts

As major Australian banks complete their 2023 financial year reporting, the industry witnessed record cash earnings of AU$32.5 billion, a 14% increase from the previous year. However, analysts believe this marks the peak, as the two halves of the past year revealed a tale of increased competition, inflationary pressures, and contracting margins.

Operating Expenses and Credit Quality

CBA reported a 3% increase in operating expenses for the first quarter, primarily driven by wage inflation. Over the full year, operating expenses for major banks rose by 3.9%, with staff costs surging by 8.2%. Despite economic challenges, CBA maintains sound credit quality, with a loan impairment expense of AU$198 million for the quarter, representing only 9 basis points of total loans. The common equity buffer stands at 11.8%, with a surplus capital of AU$7 billion above regulatory minimums.

Outlook and Resilience

CBA remains optimistic about the medium-term outlook, emphasizing its balance sheet strength and organic capital generation to support customers through challenging times. While acknowledging the current economic pressures, the bank highlights the resilience of the Australian economy, supported by low unemployment and robust population growth.

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