Bankers make hay during hard times

With the cost of living really biting, if you happen to bump into somebody who is really smiling, chances are they are a banker.

When the going gets tough in the form of a rapid string of nine interest rate rises with more to come while the prices of products and services are also jumping, bankers are one of a select few to let out a muted cheer every time the Reserve Bank of Australia (RBA) cash rate rises by 25 basis points.

Bankers are not like other people and every time interest rates rise, things start to look up for them.

That was shown very clearly in the half year results of Australia’s largest bank, Commonwealth Bank (ASX: CBA), which chalked up a lazy cash profit of $5.15 billion for the half year to the end of December.

That’s 9% better than the same period last year and dividends rose even more quickly – up 20% to a juicy fully franked $2.10 a share.

Margins improving as deposits are slow to rise

The key to the better result was the net interest margin – essentially the difference between how much the bank pays to depositors for money and what it charges to borrowers.

As you would expect after a period of fast rising mortgage rates and much slower movement in deposit rates, Commonwealth’s net interest margin climbed an impressive 23 basis points from the previous six-month period to a full 2.1%.

There were some worrying signs such as a lift in costs, rising bad loan provisions and slowing loan growth but all told the bank is in rude health and profits are very healthy.

We can broadly expect the other large banks to report similar improving results, with Commonwealth probably marginally better than the other three big banks.

Tardy banks are taking a risk

Being so slow to pass on deposit rises does come with some risks for the banks, with people including the RBA Governor Philip Lowe and Treasurer Jim Chalmers chiding them for not passing benefits through to consumers and warning that the Australian Competition and Consumer Commission (ACCC) would be investigating.

So far though, the howls of complaints from mortgage borrowers haven’t been matched by complaints by depositors who are probably instead listening to the plentiful advice to shop around to get a better deposit rate.

Market focuses on the negatives

Interestingly, the share market didn’t react well to Commonwealth’s results, taking more note of the possibility of higher costs and the possibility of bad loans rather than the strong result.

Commonwealth chief executive Matt Comyn was broadly positive about the future and particularly the resilience of consumers despite the extent of inflationary effects.

“We are conscious that many Australian households are feeling significant strain from rising interest rates, alongside the rising costs of electricity, groceries and other household items,” Mr Comyn said.

“Despite this, consumer spend remains resilient, with signs of spend slowing in pockets.”

Mr Comyn said the fundamentals of the economy remain solid, with low unemployment, strong exports and returning migration.

“We expect business credit growth to moderate and global economic growth to slow during 2023,” Mr Comyn said.

“However, we remain optimistic that a soft landing for the Australian economy can be achieved and positive on the medium-term outlook for Australia.”