Look out below. The day after the Budget saw CBA issue its most recent trading update for the previous quarter. Bad news wrapped in bad vibes meant that the stock crashed 10.4 per cent in a single day, wiping billions from the company and dragging the market down with it.
The news gets worse when you zoom out even further. Over the last five days, CBA is down over 13 per cent and down 16 per cent on the previous month.
CBA’s trading update revealed that net profit after tax for its third quarter is up 4 per cent year on year wasn’t enough to cushion the blow that some of its financials are starting to stray beyond where the market wants them. The result was around 2 per cent below analyst consensus.
A 2 per cent miss does not normally produce a 10 per cent fall. As with all things, though, the devil is in the details. Here are three reasons why CBA absolutely tanked on the market on Wednesday 13 May.
1. Customer arrears are ticking up across the consumer book
The first and most concerning thread in the update was the increase in arrears across CBA’s consumer loan portfolio. Personal loans more than 90 days in arrears rose to 1.71 per cent, the highest level since before the pandemic. Home loan arrears increased 6 basis points to 0.69 per cent. Credit card arrears rose 2 basis points to 0.68 per cent.
The bank attributed the personal loan move to a combination of seasonal factors and deliberate portfolio decisions on credit, pricing and acquisition mix. The home loan and credit card moves were described as modest seasonal effects. The market was less willing to accept the framing at face value.
Corporate stress is also visible in the numbers. Corporate troublesome and non-performing exposures rose to $6.5 billion, or 0.94 per cent of total committed exposure, up from 0.90 per cent in December. CBA described the increase as movements in single-name exposures across a range of sectors.
This third quarter is the first set of numbers showing both moving in the same direction at the same time. For a bank whose valuation rests on the assumption that Australian credit quality will hold up through the inflation fight, that is a meaningful change in the picture.
2. Negative gearing changes in the federal budget
The second and most immediate driver was external. Treasurer Jim Chalmers delivered the federal budget on Tuesday evening, the night before CBA released its trading update, and the headline announcement was a structural change to negative gearing. Under the new settings, negative gearing will be limited to newly built properties only, ending the existing arrangement that allows investors to offset losses on established residential property against their taxable income.
The reform is aimed at boosting housing supply by redirecting investor capital from established stock to new builds. The market read it as a direct hit to the future trajectory of mortgage credit growth, which is the engine room of CBA’s earnings.
Investors questioned whether mortgage demand from property investors, who account for roughly a third of new home lending in Australia, would soften materially under the new tax settings. CBA derives more than half its operating income from home lending, and any sustained slowdown in investor mortgage growth flows directly to the top line. The other major banks fell in sympathy on Wednesday for the same reason.
The detail of the implementation, including any transition arrangements or grandfathering provisions for existing investors, remains to be confirmed in the legislation. Until that detail is published, the market is pricing the most aggressive version of the change.
3. The bank signalled a darker macro outlook
The third reason is the one the market took most seriously, because it came from CBA management rather than from external commentary. CBA increased its forward-looking collective provisions by $200 million in the quarter, or 8 basis points of gross loans and acceptances. The bank also explicitly increased the weighting of its downside economic scenario in its provisioning model.
Chief Executive Matt Comyn was direct about why.
“Notwithstanding an already strong level of provisioning, we have chosen to further top up our collective provisions in the quarter to reflect heightened macroeconomic risks,” Comyn said. “Our deliberate and long-term approach to balance sheet settings enables us to support our customers and the economy.”
“We are closely monitoring the impacts of the Middle East conflict and the broader macroeconomic environment. The Australian economy continues to demonstrate resilience, but supply chain disruptions, higher prices and interest rates are expected to weigh on household spending and business activity.”
The provision top-up is the kind of move banks make when they believe the macro environment is deteriorating faster than the market is pricing. For CBA to lift its downside scenario weighting in a quarter where most external economists were still calling Australia to avoid a recession is a signal that the bank’s internal credit risk team has a more cautious view than the consensus.
We had flagged this dynamic in early May, after Paul Rickard noted on Switzer TV that NAB, ANZ and Westpac were all raising forward-looking provisions, and that the banks were “getting a little bit squirrel-like” ahead of an expected downturn. CBA’s update on Wednesday is the same pattern, at greater scale.
It’s worth noting that none of this counts as a fatal blow to either CBA or Australia’s economy. The bank remains comfortably above APRA’s minimum CET1 ratio at 11.6 per cent. Deposit funding sits at 79 per cent of total funding. Provisioning coverage is strong. The quarterly profit was still up 4 per cent on the same quarter a year ago.
What broke on Wednesday was the assumption that all three drivers would resolve favourably..
The next test will be the full-year result in August, when CBA will report a complete picture of the second half. Until then, investors will be watching personal loan arrears, the legislative detail on negative gearing reform, and whether the other major banks follow CBA’s lead on provisioning when they report their own half-year and trading updates over the coming weeks.
This article does not take into account the investment objectives, financial situation or particular needs of any individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances. Before acting on anything we discuss, we strongly recommend you seek the appropriate professional advice.
