CBA market value takes $15 billion hit despite record profits
By Clancy Yeates
Investors wiped more than $15 billion off the value of Commonwealth Bank despite the lender notching up record profits and raising dividends on Wednesday, as its results reignited debate over its lofty share price and the risk to returns from stiff competition in home loans.
The banking giant’s cash profits rose 4 per cent to a record $10.25 billion last financial year, fuelled by growth in its massive loan portfolio and a decline in bad debts.
But analysts, who have argued CBA shares are overvalued, said the numbers were unlikely to spark further market upgrades for the banking giant, sending its shares tumbling 5.4 per cent in afternoon trading.
CBA chief executive Matt Comyn received $7 million in the year to June, compared with almost $9 million in the prior year. Comyn’s fixed pay and cash bonus increased, but he received less from deferred awards that vested during the year.Credit: Oscar Colman
Shares in CBA, the biggest stock on the ASX, have surged almost 30 per cent in the past year, and bank-watchers said there was little room for error in its results, leaving the stock vulnerable if the numbers fell short of expectations.
‘The sort of myth that there wasn’t much competition in banking because it’s a concentrated industry structure is just that - it’s a myth.’
Matt Comyn, CBA chief executive
A key focus for investors was CBA’s net interest margin – which compares funding costs with what it charges for loans – which was flat in the six months to June.
Chief executive Matt Comyn said households were generally benefiting from lower interest rates, tax cuts and the decline in inflation, and fewer customers were seeking hardship assistance. However, he also said competition remained intense and had increased significantly in home lending over the past five years, while labelling rival Macquarie Bank a formidable competitor.
“The sort of myth that there wasn’t much competition in banking because it’s a concentrated industry structure is just that – it’s a myth,” Comyn said.
The bank’s net interest margin was 2.08 per cent, 9 basis points higher compared with the 2024 financial year, but it was flat in the June half compared to the December half.
White Funds management managing director Angus Gluskie said the margin was a concern for investors, even though the bank was generally in good shape.
“While it was flat, it was only flat as a result of hedging gains,” he said of CBA’s margin result. “If you abstract that, then they suffered a level of erosion in that interest margin as a result of continuing competition.”
“Investors do get a bit nervous when they see stocks trading at these kinds of multiples.”
Across the industry, margins have generally been pressured by the fall in interest rates, as so far in this cycle of rate cuts all the major banks have passed on Reserve Bank reductions to mortgage customers in full.
CBA’s annual report, also released on Wednesday, said Comyn received $7 million in the year to June, compared with almost $9 million in the prior year. Comyn’s fixed pay and cash bonus increased, but he received less from deferred awards that vested during the year.
As companies around the world try to take advantage of artificial intelligence, CBA said it had struck an agreement with US giant Open AI, which it said would bring advanced AI to customers and staff, and help to fight scams and deliver more personalised service.
CBA’s use of AI has been in the spotlight after it last month said it would cut 45 positions because of an artificial intelligence-powered chatbot for handling inquiries from customers.
Comyn said the bank had still added about 2500 people to its workforce in the past year in net terms, and that with any technological change, tasks and roles would change. He argued Australia needed to embrace the new era of rapid change in technology to remain globally competitive.
“I think some of the work that our people will do will move into higher-value activities. We’ve seen that in previous technology cycles. But ultimately, a country and an economy that’s delivering growth is delivering jobs,” Comyn said.
CBA’s full-year result report said the bank would raise its second-half dividend to $2.60 a share.Credit: Oscar Colman
CBA said higher spending on technology was a key focus, and it had increased investment by 14 per cent to almost $2.3 billion in the year to improve its technology infrastructure and AI capabilities.
Analysts, who have been sceptical about the bank’s lofty valuation, said they did not expect the market to upgrade its view on CBA on the back of its latest numbers.
Citi analyst Thomas Strong said the profit result was largely in line with market expectations, but it had been helped by one-off benefits, including a lower-than-expected expense for low bad debts. Strong said the numbers were also helped by higher-than-expected income from financial market trading, which the market regards as lower quality because of its volatility.
Barrenjoey analyst Jon Mott said there were no surprises in CBA’s result, as he also said trading income had helped the bank’s revenue. Mott, who has an “underweight” rating on CBA shares, said it was the bank’s first result since February 2023 that was unlikely to result in upgrades in the market’s forecasts for CBA’s earnings.
Jarden analyst Matthew Wilson described the result as “just OK” and also said the numbers were unlikely to drive further upgrades in the market’s forecasts for CBA’s future earnings. Wilson, who has a “sell” on CBA, said the bank’s “exalted” valuation meant it was vulnerable to falling short of market expectations.
CBA will raise its second-half dividend to $2.60 a share. The payment will be fully franked and paid on September 29.
Return on equity, an important measure of profitability, declined by 10 basis points to 13.5 per cent.
The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.