The Commonwealth Bank of Australia (ASX: CBA) share price is up another 1% today, marking an impressive $5, or 5.5%, rise from 27 March 2023 to today.
ASX bank shares have seen plenty of volatility over the past year as investors weigh up what the current economic environment means for the banking industry.
Higher interest rates have really changed the picture for banks.
Bigger profits?
The main part of CBA's profit comes from lending. In the FY23 half-year result, it generated $11.6 billion of net interest income, while just under $2 billion came from other sources.
Changes in the net interest margin (NIM) can have a major impact on how much profit the loan book makes.
The NIM measures the profitability of the lending by comparing the overall loan rate (which includes mortgages) to the cost of funding the loans (such as savings accounts). If the NIM increases, that shows stronger profitability.
CBA and the other ASX bank shares have been passing on the Reserve Bank of Australia (RBA) interest rate hikes to borrowers quickly while taking longer to pass that on to savers.
In the first half of FY23, CBA saw its NIM increase by 23 basis points (or 0.23%) to 2.10% compared to the second half of FY22. This helped HY23's cash net profit after tax (NPAT) rise by 9% to $5.15 billion and pre-provision profit go up 18% to $7.82 billion. Profit growth can be a key factor for CBA share price growth.
However, the bank did note that some of the gains of higher interest rates have been offset by "competitive pricing pressure".
The CBA CEO Matt Comyn commented in February:
We believe home loan pricing across the industry is below the cost of capital.
In other words, banks (and non-banks) are/were competing away the profit boost they'd gained from the higher interest rate environment.
It will be interesting to see what CBA says its NIM was for the second half of FY23. There may still be a substantial benefit from existing borrowers who are being slugged with those higher rates and not willing (or able) to move banks and get a lower rate.
Competition lessening?
Investors may be getting more confident on news that mortgage competition may be easing. That could be promising for the CBA share price, if the market hasn't already factored that in.
According to the Australian Financial Review, the major ASX bank shares have just increased interest rates for new borrowers.
The AFR reported that Rate City director Sally Tindall said rising funding costs, as banks paid up for deposits and navigated more volatile offshore markets, had probably prompted the move to increase prices:
For months the big banks have been fighting tooth and nail for new customers. However, this competitive streak is starting to wane. All four big banks have now walked back some of their new customer discounts as they feel the heat from the rising cost of funding.
This is a promising sign for future profitability. Not only is the NIM less likely to decrease, but this is a sign that monthly NIM could rise if the ASX bank shares are increasing lending rates.
Is the CBA share price a buy?
I don't think it's a strong buy. Online banking has meant competitors don't need a bank branch network to compete with the big players. A loan isn't a unique offering, there are many loan providers these days, which can compete on price. This suggests to me that margins could be lower in the future than in the 2010s.
However, CBA is a very powerful business and it's down 10% since early February. It's more appealing. But, if I were investing in an ASX bank share, I think there are cheaper choices than CBA shares.
