By Praveen Menon and Savyata Mishra
(Reuters) -Rising interest rates helped Commonwealth Bank of Australia (OTC:CMWAY) deliver record profits on Wednesday, but shares of the lender dropped on headwinds facing its mortgages business and concerns its margins may have peaked.
Australia's biggest lender said loan impairment expenses increased by A$586 million ($409 million) and business credit growth slowed, reflecting strong inflationary pressures, rising interest rates and a decline in property prices.
"We expect business credit growth to moderate and global economic growth to slow during 2023," said Chief Executive Officer Matt Comyn.
"However, we remain optimistic that a soft landing for the Australian economy can be achieved."
Shares in the bank fell as much as 5.7% in early trading in Sydney while the broader market fell 1.0%, amid concerns of a weaker mortgage business in the high interest rate environment and the bank's lending margins peaking.
"With further headwinds from deposit switching likely in 2H23, accelerating headwinds in the mortgage market, and a cash rate that is closer to the peak, we think concerns are likely to grow that NIMs (net interest margins) have peaked," Citibank said in a note after the earning announcement.
"Asset quality was strong in this result, but there is likely to be a perception that it will deteriorate from here as revenue tailwinds are starting to ease."
CBA said while higher earnings on deposits drove up net interest margin to 2.10% from 1.92% a year earlier, it was partly offset by increased competition in home lending.
DIVIDEND UP
After eight rate hikes through 2022 and a further quarter-basis point raise last week, the central bank has indicated more tightening ahead to stamp out inflation. Soaring rates have cooled off the housing market and added to rising cost of living pressures.
"We are conscious that many of our customers are feeling significant strain from rising interest rates, alongside the rising costs of electricity, groceries and other household items,” Comyn said in an analyst and investor briefing.
Comyn said some customers have drawn down savings and reduced spending but they have not fallen behind on repayments yet. Margins have not returned to pre-COVID levels, he said, adding that margins peaked in October on a month-on-month spot basis.
Higher interest rates are yet to hit many CBA mortgage customers as many cheaply priced fixed rate loans are expected to come off by the end of the year.
If there are two further cash rate hikes, homeowners would have to date only experienced about half of the likely impact on monthly cash flows, Comyn told investors on the call.
CBA said cash profit from continuing operations climbed to A$5.15 billion in the six months ended Dec. 31, from A$4.75 billion a year earlier, almost in line with a Visible Alpha consensus estimate.
It declared an interim dividend of A$2.10 per share, higher than the A$1.75 it paid to shareholders a year earlier.
The lender also said its "troublesome and impaired" assets fell by $500 million over the half to $6.3 billion.
Home lending volume growth slowed for the company, with gross lending coming in at A$77 billion during the first half, down from A$94 billion a year earlier.
The bank also announced it would buy back additional shares worth A$1 billion, on top of a A$2 billion share buy-back announced last February.
($1 = 1.4314 Australian dollars)