Commonwealth Bank of Australia (ASX: CBA) shares rose more than 1% yesterday in response to the FY24 result.
On the face of it, the result wasn't that impressive. The bank reported in FY24 that cash net profit after tax (NPAT) declined 2% to $9.84 billion and statutory NPAT dropped 6% to $9.48 billion.
Operating income was flat while operating expenses rose by 3% to $12.2 billion due to higher inflation impacting staff costs and additional technology spending to support delivering its strategic priorities.
I think there is one particular metric that investors should focus on within the result.
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Net interest margin (NIM)
The NIM measures how much profit banks are making on their lending in percentage terms, which compares the revenue (such as mortgage rates) to the costs (such as term deposits).
It's the key profitability measure, in my opinion, because it influences how much profit the bank is making from its loan book.
In FY24, CBA reported that its NIM decreased 8 basis points to 1.99%.
The bank explained that the NIM's year-over-year decline was largely due to the impact of competition and deposit switching, partly offset by higher earnings on replicating portfolio and equity hedges.
A declining NIM is not helpful for CBA's profit.
However, there are positive signs that the bank may have seen the end of its NIM decline. If that's the case, the outlook for the profit looks more promising.
CBA said that in the second half of FY24, its NIM improved by 1 basis point (0.01%) compared to the first half of FY24. This could be the most important underlying factor for the CBA share price.
The ASX bank share noted it has taken a "disciplined approach" to volume and margin. It reported it increased its home loan net interest income as it ceded 61 basis points (0.61%) of market share.
A key part of this is how CBA has grown its proprietary home loan mix to 66% for FY24, compared to the market of around 28%. In other words, the bank is relying on brokers much less than its banking peers.
CBA is not losing as much margin to brokers because more of its loans are direct with customers, cutting out the middleman. I think having this direct connection may also mean borrowers are more loyal to CBA, which could mean the bank doesn't need to compete as much on price (the loan interest rate).
By protecting its NIM, CBA is protecting its profitability during this period. I'm not sure if the banking environment will ever materially become less competitive, so the NIM for the banking industry could remain challenged for the foreseeable future.
But CBA is managing to take itself out of that fight somewhat because it has that direct connection to customers, being the main financial institution for just over a third of Australians.
CBA share price snapshot
Over the past year, the CBA share price has gone up around 30%, as shown on the chart below. Based on the earnings forecast from UBS, the CBA share price is valued at more than 22x FY25's estimated earnings. This seems expensive despite CBA's impressive NIM performance.
