The Commonwealth Bank of Australia (ASX: CBA) share price is in focus as it reported its FY22 result and revealed a bigger dividend.
CBA is the largest bank in Australia. It’s part of the big four ASX bank group.
CBA FY22 result
Here are some of the highlights from the bank’s report:
- Operating income up 1% to $24.4 billion
- Operating expenses down 1.5% to $11.2 billion
- Loan impairment expense decreased by $911 million to a $357 million benefit
- Deposit funding of 74%
- Cash net profit up 11% to $9.6 billion
- Statutory net profit up 9% to $9.67 billion
- Final dividend of $2.10 per share, up 5%
- Total dividend of $3.85 per share, up 10%
- Common equity tier 1 (CET1) ratio of 11.5%
CBA said that the operating income rose largely due to more lending, but this was partly offset by a decrease in the net interest margin (NIM). Business lending rose 13.6%, while home lending rose 7.4%.
The NIM measures the profit margin between the lending rate and the cost of the lending (eg the savings account rate). A loan rate of 4% and savings account rate of 2% would make a NIM of 2%. The bigger the NIM, the more profit it’s making on its loans.
CBA’s NIM fell by 18 basis points (0.18%) compared to FY21, to 1.90%. This was due to a “large increase” in low yielding liquid assets and lower home loan margins. However, the NIM is expected to rise in a rising interest rate environment, which is the case now. Profitability will have a key influence on the CBA share price.
The loan impairment expense was a benefit of $357 million thanks to the fading risks of COVID-19, which CBA had previously provisioned for. But, there are emerging risks including “inflationary pressures, supply chain disruptions and rising interest rates”. Pre-provision profit rose 3% to $13.2 billion.
Outlook for CBA and the share price
CBA’s CEO Matt Comyn said that Australian households and businesses are in a strong position, which includes low employment, low underemployment and strong non-mining investment.
He noted the increase in interest rates has hurt consumer confidence. CBA is expecting consumer demand to moderate as cost of living pressures increase.
Mr Comyn concluded:
It is a challenging time, but we remain optimistic that a path can be found to navigate through these economic conditions. We remain of the view that the medium-term outlook for Australia is a positive one. Our purpose, to ‘build a brighter future for all’, reflects the role we play in supporting our customers and the domestic economy during periods of uncertainty.
We continue to invest in our business, to reinforce our customer propositions and extend our digital leadership.
My thoughts
This period of rising interest rates is an interesting time for banks. Profitability is rising in the short-term, but how will CBA’s loans perform in six to 12 months as the higher interest rates bite into household budgets? I think a CBA share price of more than $95 (or even above $90) doesn’t really reflect the risks.
There are other ASX dividend shares that I think offer more dividend and capital growth potential over the longer-term.
