Feb 14, 2024: Australia’s major banks faced a downturn on Wednesday following a cautionary announcement from Commonwealth Bank of Australia (ASX:CBA), the country’s largest lender. CBA’s shares dropped by 3.1%, setting the tone for its peers. ANZ Group Holdings Ltd (ASX:ANZ), National Australia Bank Ltd (ASX:NAB), and Westpac Banking Corp (ASX:WBC) saw declines ranging from 1.2% to 2.1%, collectively dragging down the ASX 200 benchmark by 1%.
CBA reported a 3% decrease in cash profit for the six months ending December 31, 2023, amounting to A$5.02 billion ($3.2 billion). While the decline was less severe than anticipated, it underscored the growing pressure on lending margins due to reduced household savings in Australia, exacerbated by higher interest rates.
Initially, CBA and its peers benefited from widened lending margins as they passed on rate hikes by the Reserve Bank of Australia to customers. However, credit activity slowed in the latter half of 2023 as customers grappled with the impact of higher rates and elevated inflation.
CBA’s Chief Executive, Matt Comyn, acknowledged the financial strain on households and businesses, anticipating continued challenges in 2024, including higher arrears and impairments. He attributed the profit drop to increased costs and a competitive operating landscape.
With credit activity receding, Australian banks now face intensified competition among themselves to maintain market share. Moreover, the prospect of further interest rate hikes by the Reserve Bank of Australia adds to their concerns. Despite recent declines in inflation, it remains above the RBA’s 2% target, prompting warnings of additional rate increases to come.
CBA’s profit warning follows ANZ’s flat quarterly revenue announcement, signaling a potential slowdown in revenue growth for the banking sector after a record-high annual profit last year.
