Rising Costs and Economic Pressures Test CBA’s Profit Growth and Capital Resilience

• Net profit after tax rose 8% to $5.134 billion
• Revenue increased 4% to $14.1 billion
• Loan impairment expense declined 23% to $320 million
• Interim dividend declared at 225 cents per share, fully franked
• Operating expenses up 6% due to inflation and technology investments

Solid Financial Performance Amid Economic Challenges

Commonwealth Bank of Australia (CBA) has reported a net profit after tax (NPAT) of $5.134 billion for the half year ended 31 December 2024, marking an 8% increase compared to the prior year. This growth was driven by a 4% rise in total operating income to $14.1 billion, supported by a 5% increase in net interest income and a notable 23% reduction in loan impairment expenses.

CEO Matt Comyn highlighted the bank's focus on supporting customers through cost-of-living pressures and investing in franchise capabilities, including digital innovation and enhanced fraud protection. Despite a weaker economic backdrop, CBA's disciplined operational execution and deep customer relationships have enabled consistent financial results.

Revenue and Margin Dynamics

Net interest income increased to $11.934 billion, reflecting a 9 basis point improvement in net interest margin (NIM) to 2.08%. This was partly offset by a slight decrease in average interest earning assets. The margin expansion was driven by higher earnings on capital hedges and replicating portfolios, alongside improved consumer finance margins, despite competitive pressures on lending and deposit pricing.

Other operating income declined 4% to $2.163 billion, impacted by lower treasury and markets income, including asset sales and trading income. However, volume-driven commissions and lending fee income showed growth, as did equities income and institutional fees.

Cost and Investment Profile

Operating expenses rose 6% to $6.372 billion, primarily due to inflationary pressures, additional working days, and increased investment in technology infrastructure and generative AI capabilities. The bank continues to invest heavily in digital transformation and risk management, with total investment spend up 11% to $1.096 billion.

Staff expenses increased 7%, reflecting wage inflation and insourcing initiatives, while occupancy costs declined due to branch and office optimisations. Productivity initiatives have partially offset cost growth.

Credit Quality and Capital Strength

Loan impairment expense fell to $320 million, or 7 basis points annualised, supported by rising house prices and stable consumer arrears. The home loan 90+ days arrears ratio remained low at 0.66%, while credit card and personal loan arrears improved, aided by tax refunds and income tax changes.

CBA's Common Equity Tier 1 (CET1) capital ratio stood at a robust 12.2%, comfortably above APRA's 10.25% minimum. The bank has completed $300 million of a $1 billion on-market share buy-back program, with further buy-backs expected to modestly reduce CET1 by approximately 15 basis points.

Dividend and Shareholder Returns

The board declared an interim dividend of 225 cents per share, fully franked, representing a payout ratio of 73% of cash NPAT. The dividend reflects the bank's commitment to sustainable shareholder returns amid ongoing economic and geopolitical uncertainties. The Dividend Reinvestment Plan (DRP) remains available and is expected to be fully satisfied through on-market share purchases.

Return on equity (cash basis) improved slightly to 13.7%, supported by higher profits and a reduced share count from buy-backs.

Outlook and Strategic Focus

Looking ahead, CBA anticipates a slowing Australian economy with ongoing cost-of-living pressures, but expects inflation to moderate and an easing interest rate cycle to commence in 2025. The bank remains focused on supporting customers, investing in technology and risk management, and maintaining balance sheet strength to navigate macroeconomic uncertainties.

Comyn emphasised the bank's role in lending to productive sectors to stimulate growth, while protecting customers and communities against fraud and financial crime.

Bottom Line?

CBA’s resilient half-year results and capital strength position it well to navigate economic headwinds, but investors will watch closely for impacts from evolving credit conditions and regulatory changes.

Questions in the middle?

• How will CBA’s loan impairment provisions evolve if economic conditions worsen beyond current scenarios?
• What impact will APRA’s planned capital framework changes have on CBA’s capital structure and dividend policy?
• How effectively can CBA leverage its technology investments, including generative AI, to improve efficiency and customer experience?