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CBA shares drop despite jump in profit

Commonwealth Bank of Australia

The Commonwealth Bank of Australia (CBA) issued caution as it reported first quarter cash profit was up by a fifth on the back of above-peer growth in home and business loans

The Commonwealth Bank of Australia (CBA) warned fierce competition in its key home loan market was hurting its margins “considerably”, triggering a big sell-off in one of the world’s most expensive banking stocks on Wednesday.

The country’s No. 1 lender issued the caution as it reported first quarter cash profit was up by a fifth on the back of above-peer growth in home and business loans.

CBA has outperformed its rivals over the past year thanks to its vast branch network and technology that has helped it take advantage of a strong property market and a softer-than-expected economic hit from the pandemic.

However, the quarterly update showed that revenues were flat and the bank’s net interest margin (NIM), a key measure of profitability, was considerably lower because of mortgage competition and a low interest rate environment. Fees were also lower, CBA said.

Shares in CBA, which had gained 34% over the past year to a record A$110.19 (US$80.33) on Nov. 8, dropped nearly a tenth to a near four-month low of A$98.75 (US$71.99) after the update, their sharpest decline since March 2020. On Wednesday afternoon, the stock was trading between 7% and 8% lower.

CBA has been priced to perfection, trading on a significant premium relative to its peers, and this trading update to me shows that the extent of that premium is not justified, said Azib Khan, a banking analyst at Morgans Financial.

He said: What we are seeing is a correction to that premium, which should take place.

CBA did not disclose specifics on the net interest margin. Morgans estimated it dropped nearly 14 basis points in the quarter, while Citigroup estimated it was in the low 1.90s, down from 2.04% in June.

All three of CBA’s “Big Four” peers – National Australia Bank, Westpac Banking Corp and Australia and New Zealand Banking Group – have said in recent weeks that intense competition would continue to put pressure on margins. The trio’s shares dropped on Wednesday by between 1.3% and 1.9%.

Today’s trading update highlights that even CBA’s strong franchise is not immune from the elevated margin pressures that appears to be particularly impacting the retail banks, Goldman Sachs banking analyst Andrew Lyons said in a client note.

CBA’s cash profit for the three months ending Sept. 30 rose to A$2.20 billion (US$1.60 billion) from A$1.80 billion (US$1.31 billion) reported last year.

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