Volume growth unable to bolster CBA’s bottom line

The Commonwealth Bank of Australia (CBA) has released its trading update for the first quarter of the 2020 financial year (1Q20), posting a cash net profit of $2.3 billion, down 8 per cent from $2.5 billion in 1Q19.

However, the group’s performance was helped by a 3.5 per cent increase in home lending volumes over 1Q20, up from 3.1 per cent in 1Q19.

The bank's home lending growth is reflected in the Australian Prudential Regulation Authority’s (APRA) latest Monthly Authorised Deposit-Taking Institutions (MADIS) statistics, which revealed that CBA was the only major bank to strengthen its mortgage book over the September quarter.

CBA’s mortgage portfolio increased by approximately $3.9 billion over the quarter, rising from $434.5 billion as at 30 June to $438.4 billion.

The bank’s growth came exclusively via the owner-occupied channel, with its owner-occupied book growing by approximately $4.1 billion, from $278.7 billion to $282.8 billion.

This was offset by a decline in CBA’s investment home loan portfolio, which decreased from $155.8 billion to $155.6 billion.

In its 1Q20 update, CBA also reported that over 90-day arrears underlying its residential mortgage portfolio improved, falling from 0.67 per cent to 0.64 per cent. 

Across its other consumer segments, CBA reported business lending growth of 2.8 per cent (up from -4.2 per cent in 1Q19), and household deposit growth of 10.4 per cent (up from 8.9 per cent).  

Following the release of the trading update, CBA CEO Matt Comyn said he was pleased with the result given “global macroeconomic uncertainty” and record-low interest rates.

“Our strong capital position and balance sheet settings mean we are well placed to meet the needs of our customers, illustrated by good volume growth in our core markets of home lending, business lending and household deposits,” he said.

“In a low interest rate environment, we will continue to maintain a disciplined approach that delivers balanced outcomes for all our stakeholders, including over 6 million savings customers, 1.6 million home loan customers and 800,000 retail shareholders, including many retirees, who rely on our dividend.”

The publication of CBA’s trading update follows the release of ANZ, NAB and Westpac’s full-year results for the 2019 financial year (FY19), in which each of the banks reported declines in their underlying earnings.

An analysis of the big four banks’ financial results from consultancy firm EY has revealed that the collective cash earnings of the banks fell $2.3 billion (7.8 per cent) to $26.9 billion in FY19.

Return on equity decreased by an average of 125 bps to 10.9 per cent, while average net interest margins fell by an average of 9 bps to 1.94 per cent.

EY also reported that collective customer remediation costs totalled $5.7 billion, up $2.7 billion from FY18.

According to EY, the FY19 results of Australia’s big four banks reflect an “extremely challenging 12 months” for the sector.

EY Oceania banking and capital markets leader Tim Dring said he expects headwinds to continue throughout FY20.

“There’s no doubt that 2019 has been a tough year for Australia’s major banks, and the storm clouds show no signs of abating,” he said.

“Declining profits and margins have seen the banks cut dividends and preserve capital, as they batten down the hatches and brace for further challenging conditions ahead.”

Mr Dring attributed the weakened performances of the major banks to a number of factors, including:

• uncertainty in global markets;
• a slowing local economy and “ultra-low interest rate environment”;
• increasing consumer and regulatory pressures; and
• heightened competition and significant remediation costs.

Mr Dring also pointed to the effects of stagnation in the global economy on domestic market conditions, weaker margins associated with new lending, and continued regulatory and compliance costs.

[Related: Big bank woes ‘showing no signs of abating’]