Commonwealth Bank: The one reason why Australia’s economy stays stuck in slow lane

Commonwealth Bank says the economy remains in the slow lane as high interest rates continue to crimp consumer spending.

In announcing a flat quarterly unaudited net profit after tax of $2.5 billion, chief executive Matt Comyn was optimistic about the overall economic outlook, saying the “Australian economy remains fundamentally sound”.

He cautioned, however, that customers are still struggling.

“Inflation is moderating but at a slowing pace and global geopolitical tensions are creating uncertainty,” he said.

“Growth in the Australian economy remains slow as higher rates continue to weigh on consumer demand and bring inflation back to the target range.”

Mr Comyn told media that he was watchful that big spending policies and a potential tariff war could drive up US inflation and global interest rates, raising the prospects that Australian interest rate cuts could be delayed beyond the bank’s February forecast.

That echoes a view by ANZ chief Shayne Elliott who warned rate cuts may be pushed into late next year if Mr Trump’s policies were implemented.

“(That) would tend to be more inflationary than not,” he said last week. “That would mean less rate cuts in the US ... if the US is cutting less because of inflation, that will have some sort of flow on for Australia. It would tend to suggest less and later rate cuts over here.”

The bank results showed that home loan arrears are yet to decline in aggregate, remaining flat at 0.65 per cent of the overall lending book.

A decrease in tax rates and higher average tax refunds for the 2024 financial year has helped customers with payments. Overall arrears remain in line with the historical average, the bank said, while personal loan and credit card arrears declined.

Operating income was up 3.5 per cent in the quarter, offset by a 3 per cent rise in the company’s expenses driven by wage inflation and increased investment spending.

In a sign of consumer propensity to consolidate, household deposits rose by $15b, up 6.5 per cent and in line with the market compared to an $8.6b increase in home lending, up 4.5 per cent.

Business lending continues to be a bright spot, up 10 per cent or $2.1b over the previous quarter. Business lending was also found to be a strength at the other Big Four banks which reported their full-year results in the past month.

The firm said impaired assets were slightly higher at $8.8 billion, representing 0.63 per cent of total committed exposures, well below the historic average.

Bank analysts were impressed by the quarterly performance. Citi Research said, “momentum in both business (banking) and mortgages was better than anticipated”, while UBS told clients the bank “showed a number of positive trends most notably around an improving revenue outlook”.

Citi was buoyed by the figures for bad and doubtful debts and stated that “asset quality continues to be benign, (showing a) modest deterioration — much better than our assumption”.

Both UBS and Citi put a sell recommendation on CBA stock, worried that the bank’s record run to over $150 a share this year. The bank is up 38 per cent year-to-date and up nearly 50 per cent in the last 12 months.

Citi analyst Brendan Sproules wrote the bank “continues to defy its earnings growth capacity, we think this result in and of itself is insufficient to justify the strong share price run over the past month”.

Despite the sell recommendations, CBA shares fell two per cent in early trade, but recovered to end the day slightly lower. Banking peers were mostly lower on the day.