Over the years, Commonwealth Bank (ASX: CBA) has become a bellwether stock for the Australian economy, and it no wonder it is the most held stock across the Selfwealth platform.

Investors looking for leverage to the domestic economy, including exposure to the property market by way of the largest home loan portfolio of any lender, often view CBA earnings as one of, if not the most important result to watch during reporting season.  

So you're not left out of the loop, here are the three key learnings from Commonwealth Bank FY22 results.

Rate Hikes Have Yet to Expand Margins

While all eyes were on CBA headline results, with cash profits up 11% to $9.6 billion, interest rate hikes have yet to translate into any form of meaningful growth as far as net interest margins (NIM). 

In fact, CBA has kept its short-term wholesale funding at record lows, representing just 8% of all funding, which in itself weighs down NIM. The final quarter of FY22 saw NIM decline by a further 4 basis points, in line with the preceding quarter, albeit this is expected to improve as rate hikes are embedded into its lending portfolio.

Aside from higher wholesale funding costs, the mortgage market remains highly competitive. Growth in mortgage lending reached 7.4% across the year, but it tailed off during the second half of the period. For the year ahead, the bank is expecting this to moderate further, with expectations of growth in the 3-4% range.

Although margins have not yet benefitted from rising rates, 40% of the bank mortgage borrowers are currently on fixed rates, and these are expected to roll higher over time. 

By the end of 2022, average monthly mortgage interest repayments are set to be four times as high as they were in July, without taking into account future rate hikes. This also goes some way towards explaining why bad debts remain low,  surprisingly decreasing from 0.64% of all home loans a year ago, to 0.49% now.

Business Banking is the New Big Four Battleground 

As rising interest rates make it harder for the Big Four to grow their mortgage books, and with CBA already a market leader in this area thanks to 25% market share, it is now ramping up its efforts in the business banking segment. 

These initiatives are starting to pay dividends for the company, with cash profit from business banking up 6% to $3 billion. 

Throughout FY22, the company did $33 billion in new business lending, representing 13.6% year-over-year growth, or 1.3-times system growth. Although its market share sits at 17.7%, it is closing the gap on segment leader NAB (ASX: NAB), which accounts for around 20% of business lending activity.

In terms of business deposits, CBA saw growth of $23.9 billion, which translates into 15% annual growth or 1.4-times system growth. The bank now has the largest market share in this burgeoning category, with around 22.6% of all business deposits, while NAB is next at 20%.

Central to this growth is the fact the company saw a record increase in business transaction accounts, with 200,000 new accounts bringing in $6 billion in deposits.

Management has also gone some way towards turning around the business division liability-to-asset mix, from a deficit of $38 billion in 2019, to a $3 billion deposit surplus today. Business lending is a very clear priority for Commonwealth Bank, and may well become the focal point across all lenders if activity in the home loan market is subdued.

A Cautious Economic Outlook Expected to Improve

While CBA has weathered the uncertainty to date, CEO Matt Comyn commentary largely reflects the fact that this is because the effects of recent interest rate hikes have yet to be fully felt by consumers. Confidence is sitting below GFC levels, but spending has still been relatively buoyant.

Meanwhile, the bank is currently seeing loan arrears at a record low, while a significant portion of its loan book is ahead of their repayment schedules. In fact, 78% of home loan customers are ahead, and by an average of 36 months, although this is expected to decline.

Nonetheless, combined with Australia lowest unemployment rate in nearly half a century, and encouraging non-mining business investment, the bank sees these factors as being central in containing bad debts and impairments, even with the housing market sliding.

Mr Comyn is more cautious about the near-term impact on account of inflation and forthcoming rate hikes, but sees a brighter picture for the Australian economy over the mid-term, assuming the central bank can push through rate hikes as soon as possible to drive down inflation.

According to the bank, the Reserve Bank of Australia will add an additional 75 basis points by the end of the year to take the official cash rate to 2.6%, although a reading of 3% or higher is still a risk. It has made the base case for national house prices to slump by approximately 15%, peak to trough. 

The key message from the bank, however, is that a short, sharp contraction in the economy may prove to be a necessary hardship in order to put downward pressure on consumer spending. In turn, this would reduce the impetus for the RBA to push rates above 3%, which would risk a recession as appears likely in the UK, Europe, and the US.