Might the CBA share price be affected by a warning of a lower interest rate margin NIM)?
The post Will the CBA (ASX:CBA) share price be pressured by lower loan profitability in FY22? appeared first on The Motley Fool Australia. –
There were a number of statistics that showed an improvement compared to FY20, as well as a large share buyback.
Christmas in August for CBA shareholders
The big four ASX bank announced an off-market share buyback of $6 billion. CBA said its strong capital position and progress on executing its strategy mean it’s well placed to support its customers and manage ongoing uncertainties, whilst also returning a portion of excess capital to shareholders.
CBA’s board considered a number of reasons for this buyback, such as the resilience of the domestic economy, the capacity of the bank to adequately absorb potential stress events and the strength of its balance sheet. The buyback will benefit shareholders with a lower share count, which supports return on equity, earnings per share (EPS) and the dividend per share.
On the dividend side of things, CBA also announced a bigger payout. The board decided on an annual dividend per share of $3.50 per share, representing an increase of 17% on FY20.
Regarding the dividend, the bank said that its strong capital position and disciplined execution continues to support “strong and sustainable returns” to shareholders.
It’s going to target a full year payout ratio of 70% to 80% of cash net profit. But it’s going to take into account a number of factors, including the long-term average loss rates.
One of the main things investors like to look at when considering the CBA share price is the profit.
CBA reported a 19.7% rise of statutory net profit after tax to $8.84 billion. Cash net profit grew 19.8% to $8.65 billion.
The bank said that net profit increased due to improved economic conditions and outlook resulting in a lower loan impairment expense (of $554 million, down 78%) and a “strong operational performance.”
However, whilst CBA’s net profit increase, the net interest margin (NIM) declined 4 basis points to 2.03%.
The bank explained that decline was due to higher liquid assets, with the impact of the low interest rate environment largely offset by actions the bank has taken, lower wholesale funding costs and a favourable funding mix.
CBA warned the NIM could fall further
The NIM is an important profitability metric for banks, which is why ASX banks tell investors what has happened with the NIM in each reporting period.
A higher NIM means the bank is making more profit on its loan book. A lower NIM means its profitability is falling.
In CBA’s result release, it said:
Looking ahead, we expect a number of headwinds to impact group NIM in the next financial year. These headwinds include: the continuing low-rate environment, price competition across both lending and deposit products, unfavourable mix impacts of customers switching to fixed rate home loans and higher rate deposits, and higher liquids.
However, CBA did say that those headwinds will be partly offset by the benefit of lower funding costs from the RBA’s term funding facility.
Time will tell how CBA and investors react to the prospect of a lower NIM in FY22.
CBA share price keeps rising
Whilst it’s up around 1% today, it has actually risen by almost 9% in the last month.
The CBA share price has risen by 24% over the last six months and in the past year it has gone up 44.6%.
CBA CEO Matt Comyn shared his thoughts on the outlook:
Looking ahead, we anticipate ongoing economic impacts and earnings pressure from lower interest rates. We will continue to invest in the business to reinforce our product offering to our retail and business customers and extend our digital leadership. Through disciplined execution and our people’s care and commitment, we will continue to deliver for our customers, community and our shareholders as we build tomorrow’s bank today.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.