CBA's Q3 Results: A Contrarian Opportunity or a Margin-Squeeze Trap?

The Commonwealth Bank of Australia (CBA) has long been a bellwether for the health of Australia’s financial sector. Its latest Q3 2024 results, however, reveal a bank navigating treacherous waters: margin compression, rising loan arrears, and a cost-of-living crisis squeezing household budgets. For investors, the question is clear: Does this create a compelling contrarian buy at current valuations, or does it signal deteriorating fundamentals?

Profit Trends: Cash vs. Statutory Metrics

CBA’s Q3 unaudited results highlight a divergence between its cash and statutory profit metrics. Cash NPAT fell 5% year-on-year to A$2.4 billion, dragged down by margin pressures and inflation-driven costs, while statutory NPAT dropped 6% annually to the same figure. The gap between the two reflects non-cash adjustments, such as divestment gains/losses (e.g., its sale of Count Financial and CommInsure).

The full-year 2024 statutory profit of A$9.48 billion underscores a 4% decline from the first half, signaling accelerating pressures. Investors should note that cash profit is now 4% lower than 1H24, a worrying trend as it excludes one-off items. This suggests that operational headwinds, not just accounting quirks, are driving the decline.

Net Interest Margin (NIM): The Squeeze Intensifies

CBA’s NIM, a critical gauge of profitability, faced further headwinds in Q3. While the bank reported a “slightly lower” margin without disclosing the exact figure, context reveals the severity. The full-year NIM contracted 8 basis points (bps) to 1.99%, with competitive pressures and deposit switching to blame. Unlike U.S. banks, which saw NIMs rise due to loan yield growth, CBA’s margin erosion reflects a price war for deposits and loans in Australia.

The bank’s exit from unprofitable “cashback” mortgage promotions—a move to stabilize margins—led to a temporary contraction in mortgage growth, though volumes rebounded modestly in late 2023. This tactical shift highlights the trade-off: sustainable margins over fleeting market share gains.

Rising Mortgage Arrears: A Warning, Not Yet a Crisis

CBA’s mortgage arrears rate climbed to 0.61% in Q3, up from 0.52% in Q2 and signaling household strain. While this remains below the 15-year average of 1.38%, the trajectory is concerning. Rising interest rates and inflation have eroded disposable income, forcing borrowers to prioritize mortgage repayments over other debts.

The bank’s CEO, Matt Comyn, noted that younger households (<34) are cutting discretionary spending and savings at a faster rate than older cohorts. This demographic split could foreshadow broader arrears growth if wage growth fails to outpace inflation.

Analyst Skepticism vs. Undervaluation Potential

CBA’s shares fell 1.4% post-earnings, with analysts questioning its ability to defend margins and manage credit risks. UBS highlighted a “visible deterioration in asset quality metrics,” while Citigroup questioned valuation multiples. Yet, the stock’s current P/B ratio of 1.0x—near its 5-year low—suggests the market has already priced in much of the bad news.

Critically, CBA’s strong capital position (CET1 ratio: 12.3%) and robust liquidity (LCR: 136%) provide a safety net. The 3% dividend hike to A$4.65 per share, supported by a conservative payout ratio (79%), reinforces its earnings resilience.

For contrarian investors, the question is whether the current dip creates a buying opportunity in a sector where consolidation is likely. If inflation peaks and interest rates stabilize, CBA’s cost discipline (e.g., 4.1% operating expense growth vs. 7% non-interest income growth) could position it to outperform weaker peers.

Conclusion: A Buy for Contrarians, but Beware the Macro Storm

CBA’s Q3 results paint a mixed picture: margin pressures are real, arrears are rising, and profitability is under strain. Yet, its strong balance sheet, dividend discipline, and cheap valuation make it a compelling contrarian play—if investors are willing to bet on a macroeconomic turnaround.

The risks are clear: further margin erosion, a housing market slump, or a recession could worsen credit metrics. However, at current levels, CBA offers a high-risk, high-reward opportunity for long-term investors. For now, the stock is a “wait-and-see” call, but the setup is ripe for those willing to bet on resilience in Australia’s banking sector.

Act now or stand aside? The answer hinges on whether you trust CBA’s ability to weather the storm—or if the storm itself is just beginning.