Key takeaways:

• Commonwealth Bank reported a record full-year profit of $10.16 billion, but its net interest margins declined during the second half of the financial year

• The nation’s biggest lender expects bad debts to increase

• CBA shareholders will receive a final fully-franked dividend of $2.40 per share, while the bank will also repurchase $1 billion worth of shares in FY24

A perennial favourite in the Selfwealth community, and an all-important barometer for the local economy, Commonwealth Bank (ASX: CBA) reported its full-year results for FY23.

Between rising interest rates, higher funding costs, and intense competition between the banks, there are no shortage of factors for bank shareholders to consider at this time. 

Of course, the CBA juggernaut was always going to deliver an eye-watering profit. And already, much has been made of the bank’s monster result. But is everything as it seems? These are some of the key takeaways from CBA’s FY23 report.

Record Profits Mask Sliding Margins

All eyes were on Commonwealth Bank’s bottom line as the nation’s biggest lender reported a record full-year profit of $10.16 billion.

Beneath the surface, however, CBA’s profit margins slimmed throughout the second half of the financial year amid fierce competition in the home loan market, and as competition for deposits also stepped up. 

The lender reported that net interest margins (NIM), which represent the difference between interest earned from borrowers and interest paid to depositors, rose 17 basis points to 2.07% across the course of the financial year. 

However, due to higher funding costs and loan competition, NIM fell 5 basis points to 2.05% over the June half. The company expects “downward pressure on margins” to continue, despite a number of banks winding up cash back offers that contributed to lower margins.

Bad Debts Are Rising And Expected to Increase Further

It’s no surprise to any followers out there that mortgage borrowers are facing a tough time in the wake of 12 interest rate hikes.

The bank recorded an uptick in bad debts, and management anticipates this will only increase over the coming months as a number of borrowers transition from low fixed-rate loans to variable loans with higher repayments.

The biggest indicator as to the uncertainty that lies ahead was the bank’s loan impairment expenses, which rose by $1.47 billion. Total loan impairment provisions stand at $6 billion.

CBA results indicated that at the end of June 2023, 78% of home loan customers were in advance of their repayments, which was comparable to the results seen in FY21 and FY22.

But the total amount of impaired loans reached $1.86 billion, with ASB impairments up $245 million. This was attributed to increased hardship support arising from the RBA rate hike cycle, as well as cyclone and flood support.

Meanwhile, based on data provided by the bank, an estimated 3.4% of its variable rate owner-occupier borrowers who took out a loan within the last five years are now in negative cash flow. At the same time, home and personal loans with payments more than 90 days overdue worsened, with CBA expecting this, and 30-day arrears to “trend higher” in FY24.

Even Amid a Weak Backdrop, CBA is Confident

At the end of the period, CBA’s common equity tier 1 capital was 12.2%, representing $9 billion of surplus capital above the regulatory minimum.

Its cash return on equity was the highest since 2017, but management emphasises that, at 14%, this is well down on the 19% recorded a decade ago. It means the bank is having to rely on greater levels of capital to generate the same earnings. Today’s cash return on equity is even sitting below the average for the S&P/ASX 200, despite many commentators singling out CBA for its enormous profits.

And although it sees conditions likely to deteriorate in FY24, which could mean lower profits in the year ahead, the bank still had the confidence to boost its dividend and announce plans for a share buyback.

CBA announced a final fully-franked dividend of $2.40 per share, which meant the bank’s full-year dividend reached $4.50. That is up from $3.85 per share in FY22. The lender also said it will buy back up to $1 billion worth of its shares in the current financial year.

The pillars for this confidence can be explained by the performance of CBA’s business banking division, where profits soared 32% to $4 billion, and the significant financial buffer that the bank has  accumulated on its balance sheet to support customers facing default.