The Commonwealth Bank of Australia’s (CBA) third-quarter trading update has intensified concerns about the outlook for Australia’s major banks after the lender increased collective provisions and flagged rising geopolitical and macroeconomic risks.
The bank reported unaudited cash net profit after tax of about $2.7 billion for the March quarter, up 4 per cent on the prior corresponding period, although investors reacted sharply to the update as concerns grew around deteriorating credit quality, persistent inflation and pressure on lending margins.
CBA said it increased the forward-looking component of collective provisions by $200 million during the quarter after revising its macroeconomic forecasts and increasing the weighting applied to downside scenarios. Meanwhile, loan impairment expenses rose to $316 million.
Chief executive Matt Comyn said households and businesses were continuing to face pressure from higher energy prices and interest rates, while conflict in the Middle East was disrupting supply chains and adding to global uncertainty.
“Many Australian households and businesses are navigating cost-of-living pressures from higher energy prices and interest rates. Conflict in the Middle East is disrupting critical supply chains and contributing to global uncertainty,” Comyn said.
The bank also reported higher consumer arrears and an increase in troublesome corporate exposures during the quarter, with personal loan arrears rising 30 basis points and corporate troublesome and non-performing exposures increasing to $6.5 billion.
VanEck senior portfolio manager Cameron McCormack said the results reflected mounting stress emerging across the banking sector as restrictive monetary policy and geopolitical instability weighed on consumers and businesses.
“CBA’s latest trading update signals a more cautious turn, with the bank setting aside an additional $200 million to prepare for potential future losses,” McCormack said. “The move reflects rising concern around global supply disruptions linked to the Middle East, alongside ongoing pressure on Australian households.
“Investors have reacted swiftly, pushing shares sharply lower. CBA has already fallen 8 per cent today. This pessimism highlights growing unease around the outlook for Australian banks.”
McCormack added that provisioning had started to rise across the major banks this reporting season as higher interest rates continued flowing through to households and businesses.
“We are starting to see early signs of stress emerge more broadly. Arrears are edging higher across personal loans, home loans and credit cards, while total provisioning has risen to $6.5 billion. Importantly, this is not isolated to CBA,” he said.
“Provisioning has been stepping up across the major banks this reporting season, which is consistent with the cumulative impact of restrictive monetary policy beginning to bite.”
The pressure on borrowers comes as inflation remains elevated and labour market conditions continue to limit the Reserve Bank’s ability to ease policy settings.
“At the same time, inflation remains a persistent headwind. The employment market is remaining hot while we are contending with the pressures stemming from the conflict in the Gulf,” McCormack said.
CBA’s operating income remained flat during the quarter as lending and deposit growth offset the impact of two fewer trading days, while operating expenses excluding notable items increased 1 per cent due to higher cloud computing volumes, software licensing and investment in artificial intelligence capabilities.
Net interest income increased 1 per cent during the quarter, although the bank acknowledged competition across home and business lending continued to weigh on margins.
McCormack said the sector was now facing margin pressure from both slowing credit demand and fierce competition preventing banks from repricing loans.
“This combination is creating pressure on bank margins from both sides. On the demand side, higher rates are weighing on consumers and slowing credit growth. On the supply side, intense competition is limiting the ability for banks to reprice loans,” he said.
“As a result, net interest margins are increasingly being squeezed.”
Despite maintaining a Common Equity Tier 1 ratio of 11.6 per cent, well above APRA’s minimum regulatory requirement of 10.25 per cent, McCormack warned valuations across the major banks appeared stretched relative to weakening fundamentals.
“These dynamics suggest the cycle is beginning to turn. Growth may remain limited given the highly competitive lending environment and weaker demand for credit,” he said.
“At the same time, share prices already reflect a lot of optimism, with valuations looking stretched relative to underlying fundamentals. This could be the first of a series of warning bells for the sector.”
McCormack said investors may find stronger value opportunities outside the largest banks.
“From a valuation perspective, we see more compelling opportunities outside the mega-cap banks. Mid-cap names are currently screening more attractively, with valuations at more reasonable levels relative to the top end of the index,” he said.
“Taking an equal weighted approach to Australian equities is another way investors can avoid overexposure to the big banks.”
