Despite the 13 increases over the 18 months to November 2023 in the Reserve Bank of Australia’s official cash rate to 4.35 per cent, analysis of the Commonwealth Bank of Australia’s (ASX:CBA) half-yearly result for the 6 months to December 2023 shows an organisation that is doing a good job managing through an economic environment where “financial conditions continue to tighten”.

On page 85 of the profit announcement, the Commonwealth Bank of Australia’s central and downside assumption scenarios for calendar years 2024 and 2025 are tabled below, and the company claims they are maintaining a cautious approach to managing risks.

For example, the Commonwealth Bank of Australia argues the provision coverage (of $6.1 billion) to credit risk weighted assets (of $370 billion) at 1.64 per cent is a provision buffer of $2.2 billion relative to losses expected under the central assumption. 

That is under the central assumption, the figure approximates $3.9 billion or 1.05 per cent of the credit risk weighted assets.

Other highlights with a consumer focus include:

• Loan impairment expenses have declined from $511 million (6 months to December 2022) and $597 million (6 months to June 2023) to $415 million or 0.09 per cent of risk weighted assets (of $464 billion, in the six months to December 2023); and
• Over the twelve months to December 2023, consumer arrears greater than 90 days for personal loans have increased (as a percentage of average gross loans and acceptances) from 0.95 per cent to 1.14 per cent, but this remains below the 15-year historical average of 1.25 per cent. Meanwhile, for credit cards, this has jumped from 0.46 per cent to 0.60 per cent, again below the 15-year historical average of 0.90 per cent. And for home loans, the percentage has grown from 0.43 per cent to 0.52 per cent, whilst the historical average is 0.65 per cent.
• I believe this final indicator is one to focus on as the Commonwealth Bank of Australia had $82 billion worth of fixed loans written at rock bottom interest rates expiring over the 18 months to December 2023. Over the 18 months to June 2025, there is a further $81 billion worth of fixed loans which will expire. The move to a variable rate of interest after 13 official cash rate increases paints an unhappy picture for these customers.

The Montgomery Fund and the Montgomery [Private] Fund owns shares in Commonwealth Bank of Australia. This blog was prepared 16 February 2024 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Commonwealth Bank of Australia, you should seek financial advice.