© Reuters. FILE PHOTO: A man uses a Commonwealth Bank of Australia ATM in Sydney, Australia, April 19, 2018. REUTERS/Edgar Su/File Photo
By Byron Kaye and Sameer Manekar
(Reuters) – Commonwealth Bank of Australia (OTC:), the country’s biggest lender, posted record annual profit on Wednesday as rising interest rates helped it charge customers more, but warned higher living costs were pushing up debt arrears and competition was squeezing margins.
The update from the supplier of a quarter of Australia’s A$2 trillion ($1.3 trillion) of mortgages signals a turning point for a sector that benefited from a property boom through COVID-19 restrictions then 400 basis points of rate hikes. Banks now must sacrifice profit to keep customers who are struggling to make repayments on time.
Cash profit for the year to June rose 6% to A$10.16 billion, slightly ahead of analyst forecasts, but CBA put aside $A1.47 billion more in provisions due to “ongoing cost of living pressures and rising interest rates”. Loan repayments past 90 days late rose slightly since December, although they remained below long-term averages, the bank said.
The bank’s net interest margin – a closely watched metric which shows takings from loan repayments minus interest payouts to depositholders – shrank since December and the bank expected pressure to continue into 2024.
“There are signs of downside risks building as rising interest rates have a lagged impact on mortgage customers and other cost of living pressures become a financial strain for more Australians,” CEO Matt Comyn said in a statement.
“We are seeing consumer demand moderate and economic growth slow and we are closely monitoring the impact of reduced discretionary spend, particularly on our small and medium sized business customers,” he added.
Sweetening the results announcement for investors, CBA said it would buy back A$1 billion of stock and declared a final dividend of A$2.40 per share, taking total dividends for the year to a record of A$4.50.
Shares of CBA, Australia’s second-largest company by market capitalisation, were up 2% in early trading, against a flat overall market, as analysts noted the bank’s exposure to a gloomy economy remained limited.
“Despite rising arrears off historical lows, the credit experience remains benign,” Citi analysts said in a client note, adding the “supporting metrics will add to the stock’s defensiveness in the current environment”.
CBA’s smaller rivals National Australia Bank (OTC:), Westpac and ANZ Group are expected give third-quarter updates over the course of the month.
(This story has been corrected to note that it was cash profit, not net profit, and to fix percentage change to 6% from 5%, in paragraph 3)
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