By Byron Kaye and Sameer Manekar
SYDNEY (Reuters) - Commonwealth Bank of Australia (OTC:CMWAY), 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 ended June 30 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 that shows takings from loan repayments minus interest payouts to deposit holders - has shrunk since a December peak, and it forecast pressure to continue into 2024.
CBA stopped offering cash payments for mortgage refinancings to lure new borrowers in June, which CEO Matt Comyn said had "weighed on our market share".
"We're comfortable losing some share of low-return" loans, he added on analyst call. CBA's mortgage book grew in line with the total market in 2023.
The number of borrowers struggling to repay loans, while rising, remained below pre-pandemic levels "but these figures will rise", Comyn said.
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% by mid-session, 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:NABZY), Westpac and ANZ Group are expected give third-quarter updates over the course of the month.
($1 = 1.5298 Australian dollars)