Commonwealth Bank: Low Bad Debts and Moderating Margin Pressure Underpin Earnings

The largest and most profitable Australian bank is not immune from industrywide margin pressures. Commonwealth Bank reported a third-quarter profit of AUD 2.4 billion, down 3% on the quarterly average of the first half of fiscal 2024. The decline is tracking marginally better than we expected, though, thanks to lower expense growth and bad debts. Bad debt expenses and arrears are low at 0.08% of loans, compared with our medium-term forecast of around 0.15%. While continuing to rise, home loans behind on payments are below historical averages, and we suspect equity buffers, the strength of the labor market, and strong house prices will keep actual bank losses manageable even as household stress rises.