Own CBA shares? Here's what to look out for with the bank's Q3 update

Australia's largest bank is releasing its third-quarter update next week.

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Commonwealth Bank of Australia (ASX: CBA) shares will be in focus next week when Australia's largest bank releases its third-quarter update.

Ahead of the release, let's see what analysts are watching out for when the big four bank reports.

CBA quarterly preview

Analysts at Goldman Sachs have named a few items that they think investors should keep an eye on next week.

One item is mortgage profitability. Its analysts stated:

Management noted that while there has been some improvement in mortgage profitability, largely due to the removal by most banks of cash back offers (led by CBA), margin pressure from home lending will continue in FY24 (but has lessened) and management further noted that competition has actually been more intense in New Zealand than in Australia, highlighting new mortgage spreads in New Zealand were currently about half that of Australia. The headwind from deposit mix switching has started to stabilise.

Another area of interest for investors to focus on is bad debts. Particularly given how rising interest rates have yet to show a meaningful impact on this metric. It adds:

To date, the expectation of BDD [bad and doubtful debts] and asset quality normalization (on the back of mortgages rolling off lower fixed rates to higher variables rates) post the rate hiking cycle has yet translate to a deterioration back to longer-term averages.

While loan losses and asset quality have continued to outperform expectations, we do continue to see a steady trend towards mid-cycle. According to company commentary, management teams across the majors are comfortable with current levels of provisioning but remain cautious on the macro outlook.

In light of this, Goldman advised that it "will be looking for signs of asset quality deterioration, whether it be in new problem loans, single name exposures, or evidence of a marked change in spending habits, via the banks' payments data."

What else?

In the current environment, costs control will be very important for CBA and other ASX bank shares.

Goldman thinks productivity will be the key to overcoming soft revenue growth. It explains:

In light of the soft revenue growth environment, it has become increasingly important for the sector to take a more proactive approach in cost management. Adding to this challenge has been stickier than expected inflation which was a headwind to costs in FY23 with its impact broadly based across i) staff, ii) third party, iii) and investment spend. Overall we are of the view the key to offsetting these inflationary pressures will be the banks' ability to deliver productivity improvements.

As a reminder, CBA's cash profit was down 3% and its net interest margin was down 6 basis points to 1.99% during the first half. This reflects flat operating income and higher operating expenses, offset by a decrease in loan impairment expense.

CBA is releasing its results on Thursday 9 May.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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