Billions wiped off CBA as margins feel the squeeze

More than $19 billion has been wiped off Commonwealth Bank’s market value in afternoon trading after the banking giant said its profit margins drifted lower last quarter, with its latest trading update reigniting debate about its high valuation.

Commonwealth Bank shares had tumbled 6.6 per cent on Tuesday, despite analysts saying the bank’s first-quarter trading update was broadly in line with market expectations.

The drop came as chief executive Matt Comyn said competition for wealthier customers with larger mortgages in the nation’s biggest cities had increased and that the banking giant was closely watching the state of competition in the market.

“We’re certainly seeing a lot of increasing competitive pressures, I mean in retail banking, particularly for more affluent customers in the major cities,” Comyn said.

He said CBA held its market share in the latest quarter, but said the bank was “calling out that we’re continuing to think through very carefully about how to most effectively compete and navigate through a very competitive cycle.”

Even though the $2.6 billion in earnings for the September quarter was broadly as expected, the update from CBA comes amid ongoing debate about its valuation, and follows solid results from its key rivals Westpac, National Australia Bank and ANZ Bank.

Analysts on Tuesday suggested CBA has been priced for near perfection by investors, leaving its share price vulnerable when its numbers did not prompt the market to upgrade its forecasts for the bank.

Jarden analyst Matt Wilson suggested the sharp move in CBA shares was driven by the fact that many investors had previously piled into the stock, stretching its valuation and leaving no margin of safety.

Wilson said the Tuesday update from CBA had not been enough to drive upgrades and that recent results from rival banks may have caused investors to question CBA’s high valuation.

“Maybe the rest of the banks are not as bad as they were a few years ago and maybe investors are rotating [away from CBA],” Wilson said.

UBS analyst Jon Storey said quarterly results had been unpredictable, but the headline figures on Tuesday suggested CBA was on track for first-half profits “broadly in line with expectations”.

Storey said a 6.1 per cent increase in costs was “somewhat surprising,” as was a decline in CBA’s capital ratio. He noted CBA shares had outperformed Westpac and NAB over the past month. “Given the current valuation, it would appear perfection is implicitly expected,” Storey said.

Ten Cap co-founder and portfolio manager Jun Bei Liu said Tuesday’s share price reaction appeared to be “overdone,” but it was a function of CBA’s high valuation.

“It’s very expensive relative to other banks. Investors are less forgiving,” she said.

In his comments on competition in the market, Comyn noted that CBA rivals had all said they wanted to write more business through their own bankers, instead of through mortgage brokers. Macquarie, in contrast, writes almost all of its loans via mortgage brokers, though it is also focused on more established borrowers with substantial equity in their homes. Banks are also focused on business clients, who are often relatively well off.

The trading update showed CBA’s cash profits in its first quarter rose 2 per cent to $2.6 billion, with the banking giant reporting stronger momentum in its massive mortgage and deposit portfolios, alongside growth in business banking.

CBA said it had grown its home loan book by $9.3 billion in the quarter, slightly more than the industry average, while it hoovered up an extra $17.8 billion in household deposits – also faster growth than the market average.

The bank said its charges for bad loans were broadly flat, with lower consumer arrears and lower charges for troubled business corporate loans.

The bank’s underlying margin – which measures funding costs compared with what it charges for loans – was “slightly lower” as a result of customers switching to higher-interest deposits, competition and the lower interest rate environment.

Comyn said cost of living pressures were challenging for many customers, but households and businesses had felt some relief from the decline in interest rates this year. After the recent jump in inflation, Comyn said he thought interest rates were on hold for now, with more information on the December quarter inflation data due in late January.

“We always thought it was going to be a relatively shallow rate-cutting cycle, but it’s certainly possible that rates are on hold for an extended period now,” he said, adding the RBA would be driven by economic data.

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