The Commonwealth Bank of Australia (ASX: CBA) share price climbed 11% in FY23, compared to a 10% rise for the S&P/ASX 200 Index (ASX: XJO).
It has been an eventful 12 months for both the Australian economy and the ASX bank share.
Let's have a look at two of the main thrusts behind the share price return of the Commonwealth Bank.
Image source: Getty Imgaes
Uncertain start
The CBA share price started FY23 at around $90. A year ago, there was increasing concern about the strength of inflation growth, both in Australia and worldwide.
During June 2022, CBA shares took a dive after it became clear the Reserve Bank of Australia (RBA) would need to rapidly hike the interest rate to start bringing economic demand under control.
In June 2022, the RBA lifted the interest rate by 50 basis points, sending a shockwave through the economy and it came with a warning that the board expected to normalise monetary conditions in the months ahead.
So, it was under this cloud that the ASX bank share started FY23 at the valuation it did.
Rapid profit increase followed by competition worries
Over the subsequent months, the CBA share price generally rose to higher and higher points, as we can see on the chart below, despite widespread market worries about inflation.
Higher interest rates meant that banks could earn stronger lending profits as they were passing the interest rate hikes onto borrowers faster than to savers. Also, it was earning more on transaction account balances.
The FY23 first-half result saw a 9% rise in the cash net profit after tax (NPAT) to $5.15 billion following a 23 basis point (0.23%) rise to 2.10%. This helped increase the interim dividend by 20% to $2.10 per share.
However, the CBA CEO also warned of intense competition in the banking sector, and that some lenders were lending out money below the cost of capital. In other words, the banks had to decide whether to lose some market share or lose some profitability.
That's why, in the third quarter of FY23, the Commonwealth Bank said it saw a "lower margin from competitive pressures on home loans and deposits". That quarterly profit of $2.6 billion was up 10% year over year, but only up 1% on the quarterly average profit of the FY23 first half.
Intensifying competition in the bank sector seemed to spark the CBA share price to fall by around 10% since February 2023.
Talking about the outlook when releasing the FY23 third quarter update, CEO Matt Comyn said:
Many of our customers are feeling the strain of higher interest rates and the rising cost of living. We remain committed to supporting our customers through these challenges. As higher interest rates impact the Australian economy in the period ahead, we expect economic growth to continue to moderate. Despite the challenging global economic outlook, Australia is relatively well positioned given the strength of our banking system, the economic tailwinds from a recovery in population growth and relatively high commodity prices. We remain positive on the medium-term outlook. The strength of our balance sheet means we are well placed to continue supporting our customers and the broader Australian economy while delivering predictable and sustainable returns to our shareholders.
Those comments suggest that the CBA share price could remain resilient.
