Home / Top performers / As Wesfarmers, CBA deliver bumper earnings, pressures mount

A higher net interest margin drove a 10 per cent increase in CBA's net profit after tax, while Wesfarmers benefited from a strong performance by Kmart Group and the chemicals division. But with much of the upside for these companies already priced in, investors should be clear about valuations before buying in.

Commonwealth Bank of Australia and Wesfarmers both delivered double-digit earnings growth in the first half of fiscal year 2023, buoyed by resilient households and businesses.

CBA increased its net profit after tax by 10 per cent to $5.2 billion in the first half of FY23. The higher earnings were largely a result of an expansion in the bank’s net interest margin to 2.1 per cent from 1.9 per cent in the first half.

The net interest margin measures the spread between what a bank earns on its loans and the cost of deposits. A higher net interest margin, all else equal, leads to higher earnings for the bank.

DNR Capital investment analyst Chris Tynan (pictured) said net interest margins are likely to have peaked in the final quarter and will moderate going forward as competition for mortgages intensifies. There will also be competition for deposits, on which CBA relies for 75 per cent of its funding mix.

“We’re beginning to see the impact of higher rates flow through to the mix of deposits as customers move from very low-interest transaction and savings accounts to attractive term deposit rates,” Tynan said. 

“This will put further pressure on bank margins.”

CBA announced an interim fully franked dividend of $2.10 per share, a 20 per cent jump on the prior year’s interim dividend. The dividend will be paid on or around March 30, with a dividend reinvestment plan offered.

“The stronger dividend looks sustainable for the time being and reflected higher interest rates boosting profits,” Tynan said. “The risk is [that] if a hard landing emerges, this may need to be revisited.”

Regarding credit quality, home loans and credit card arrears remain at historically low levels. Personal loans, while remaining low, have begun to trend upward.

CBA remains well capitalised, with regulatory Common Equity Tier 1 capital of 12.1 per cent, above the minimum 10.25 per cent set by the Australian Prudential Regulation Authority.

“We think CBA is a very strong franchise, but this strength is reflected in the share price,” Tynan said. “The current valuation does not provide a buffer for the risk of a harder landing, especially in property markets.” 

Wesfarmers benefits from cost-conscious buyers

Wesfarmers reported a 14.1 per cent increase in net profit after tax to $1.38 billion for the first half of FY23, buoyed by a strong trading performance from Kmart Group and the chemicals division.

“Sales remain robust despite pressure on consumers,” Tynan said of the retail conglomerate’s results. “Some trading down into Kmart is benefiting the group, which is likely to drive earnings this year.

“Bunnings continues its impressive growth despite bad weather and lapping strong sales last year, but margins reflect the need to invest in price and deliver value to customers.”

Wesfarmers subsequently declared a fully franked dividend of 88 cents per share, up 10 per cent from a year ago.

“Elevated inflation and higher interest rates are expected to impact demand in parts of the Australian economy and result in households continuing to become more value-conscious,” Wesfarmers said in announcing the half-year results.

“In this environment, the strong value credentials and low-cost operating models across the group’s retail businesses mean they are well positioned to meet changing customer demand as customers adjust to cost pressures.”

Tynan said the prediction that online shopping would accelerate the downfall of bricks and mortar proved wrong, noting that Wesfarmers subsidiary Catch.com’s operating loss more than doubled in the half.

DNR does not currently hold CBA or Wesfarmers in its portfolios, but Tynan said he would consider buying Wesfarmers at a more modest valuation.

“FY23 is likely to deliver double-digit growth over the next few years, but this is in part driven by Kidman [Resources]-related lithium earnings coming online and the new healthcare division beginning to contribute,” he said.

“Wesfarmers is likely to return to more sustainable earnings growth, but opportunities for M&A are a key part of the investment thesis.”