The Q1 FY15 update has seen the unaudited cash earnings at Commonwealth Bank of Australia (CBA) increase to $2.3 billion, a 9.5% beat on the corresponding period in FY14, while bad and doubtful debts (BDD) fell to $198 million – a 13.2% decline on Q1 FY14. These figures show that CBA’s superior market position is holding it in good stead and it is well and truly outstripping its peers in key markets. It also shows it has room to move on price and margins if required.
However, even CBA can’t escape the increases in competition. Net interest margins (NIM) were ‘marginally lower’ according to the update, as increased competition in lending was not offset by improved wholesale funding costs. At the previous full-year numbers, CBA’s NIM was 2.11%, suggesting CBA is likely to have margins under 2.1%. Margin shaving has been an issue across the Big 4 and is unlikely to change in the coming quarters.
The capital ratio was also weaker than expected, coming in at 8.6% as risk-weighted assets increased, leading to higher provisioning under the Basel III requirements. Increased risk lending will only see capital ratios falling as the bank is forced to increase funding to meet the regulatory requirements.
The language tone throughout the update has also changed – revenue ‘maintained’ and funding remained ‘sound’. It’s certainly not the same bullish outlook CBA had at the beginning of the calendar year. The ramp-up in the housing market has undoubtedly provided CBA which a really solid cash injection and growth profile, and it remains the most nimble and active bank.
However, like the other three, CBA has seen lending slowing. Slower lending will lead to more competition as the pool shrinks, thinning margins. The ability to hold on to the elevated share price values on the current outlook remains tough.