Australia's CBA faces market dominance test as lower annual earnings loom
Credit losses, costs to weigh on CBA
CBA FY24 profit to fall below A$10 bln
Aussie business lending upbeat despite high rates
More rate hikes will harm asset quality - Citi
By Roushni Nair
Aug 13 (Reuters) -Commonwealth Bank of Australia CBA.AX, the country's biggest lender, is expected to unveil a small decline in annual earnings on Wednesday, with investors focused onwhether rising deposit payouts and bad loans will outweigh gains in mortgage revenue.
The earnings will be closely watched to see if the lender's share price surge of one-third since late 2023 is justified, especially considering the broader banking sector in July posted its strongest rally in nearly two years.
"Aussie banks have been seen by investors in the region as a safe place to park, whilst China is experiencing softness and within the sector. I think CBA is seen as the most defensive bank out of all the majors," said Azib Khan, who leads banking sector research at E&P Financial.
Although strong, Australian banks face a market where borrowers are increasingly struggling to make loan payments as interest rates are at a 12-year high, while depositors are shifting funds into savings accounts paying attractive rates.
CBA's lending growth likely improved in the second half, matching the broader market in housing loans, but underperformed in other non-housing sectors, Goldman Sachs analysts said.
CBA is projected to report a 3.5% decline in its annual cash earnings for the year to June to A$9.68 billion ($6.37 billion) from a record A$10.16 billion last year, according to LSEG estimates.
By comparison, annual cash earnings for National Australia Bank NAB.AX, Westpac WBC.AX, and ANZ ANZ.AX are expected to fall between 5% and 9% when they report annual results for the year to September, according to Visible Alpha estimates.
CBA is expected to benefit from the growing spread between new variable-rate mortgages and older fixed-rate loans. This advantage stems from the bank's 25% share of Australia's $2.2 trillion mortgage market.
Australia's central bank has held rates steady at 4.35% since November after hiking by 425 basis points from May 2022. Markets expect an easing by year-end, although the Reserve Bank of Australia has left the door open to further tightening.
Analysts at Citi, with a sell rating on the sector, warn that if the RBA tightens further, banks' asset quality could suffer.
"Like past cycles, this would see negative earnings revisions, and certainly put inflated multiples at risk," Citi analysts said.
National Australia Bank NAB.AX is due to give a limited third-quarter trading update on Friday, followed by Westpac WBC.AX on Aug. 19 and ANZ ANZ.AX on Aug. 20.
($1 = 1.5188 Australian dollars)
CBA Share Price https://tmsnrt.rs/4dG1Z5I
Reporting by Roushni Nair in Bengaluru; Editing by Sonali Paul
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