By Alice Uribe


SYDNEY--Commonwealth Bank of Australia posted an 8% fall in half-year net profit, driven partly by higher operating expenses and competitive pressures, with the lender warning of higher loan arrears in 2024.

Australia's biggest bank by market value said Wednesday that net profit fell to 4.76 billion Australian dollars (US$3.07 billion) in the six months through December.

"As cash rate increases have a lagged impact on households and business customers, we expect financial strain to continue in 2024, with an uptick in our arrears and impairments," said Chief Executive Matt Comyn.

Half-year cash earnings--the measure that strips out items including hedging and losses or gains on acquisitions and asset sales--fell 3% to A$5.02 billion from the previous year. Still, this beat a consensus estimate of A$4.92 billion in a FactSet-compiled poll of analysts.

Half-year revenue fell 3% on year to A$13.58 billion, while operating expenses rose by 4% to A$6.01 billion, which the lender said reflected inflation and additional technology spend that was partly offset by productivity initiatives.

Commonwealth Bank's result across its core units was uneven, with cash earnings from retail banking services of A$2.69 billion, down 7% on the previous year.

"The result reflected a 4% decrease in operating income, a 3% increase in operating expenses and a 10% decrease in loan impairment expense," said Commonwealth Bank.

Still, cash earnings from business banking were A$1.90 billion, up 6% on year and institutional banking and markets earnings were A$589 million, up 28% on year.

Commonwealth Bank's net interest margin, a measure of the difference between what a bank pays to get deposits and funds and what it charges, was down 11 basis points on the previous year to 1.99%.

Australian banks benefited from interest rate hikes, but intense competition on home loans and customer deposits has weighed on margins, offsetting some of the gains. Commonwealth Bank stepped back from the mortgage market, ceding market share in the process, but recent regulator data showed the lender has moved to grow its home loan portfolio.

The lender attributed the fall in first half net interest margin partly to increased competition, customers switching to higher yielding deposits and higher wholesale funding costs.

On consumer arrears, Commonwealth bank said these had increased in recent months but remain historically low, reflecting ongoing pressures from higher interest rates and cost of living. At the same time, the lender said personal loans decreased reflecting improvements in origination quality.

Troublesome and impaired assets decreased to A$6.9 billion from A$7.1 billion at end-June.

Meanwhile, the lender's loan impairment expense was A$415 million in the first half, down some A$96 million on year, driven mainly by lower collective provision charges reflecting ongoing portfolio resilience, Commonwealth Bank said.

While the economy was "fairly resilient" through 2023, supported by a strong labor market, savings and repayment buffers, population growth and relatively high commodity prices, Commonwealth Bank sees this changing.

"Downside risks are building as slowing demand and persistent inflation impact Australian businesses. Ongoing geopolitical tensions also create uncertainty," said Comyn.

Directors of the company declared an interim dividend of A$2.15 a share, up from A$2.10 last year.

The bank's Common Equity Tier 1 capital ratio--a measure of a bank's ability to withstand financial shocks--was 12.3% at the end of December, remaining well in excess of regulatory minimum capital requirements.


Write to Alice Uribe at alice.uribe@wsj.com


(END) Dow Jones Newswires

02-13-24 1634ET