Paulina Duran

SYDNEY, (Reuters) – Australia’s Commonwealth Bank said that fierce competition in the key home loan market is affecting its margins “considerably”. This triggered a huge sell-off of one of the most valuable banking stocks in the world on Wednesday.

This is the country’s number one lender. The caution was issued by the No. 1 lender because it announced that its first quarter cash profit increased by five percent due to above-peer growth of home and business loans.

CBA has outperformed all its competitors over the past 12 months thanks to its large branch network and technological innovation that have enabled it to profit from a hot property market as well as the softening of the economic effects of the pandemic.

The quarterly update revealed that revenue was flat, and net interest margins (NIM), which is a crucial measure of profitability, were “considerably lower”. This could be due to mortgage competition and low interest rates. CBA also stated that fees were lower.

CBA shares fell almost a tenth after their record A$110.19 November 8th, a 34% increase over the previous year. They dropped to A$98.75, their lowest point since March 2020, and almost a tenth of a month. CBA stock trades between 7%-8% lower Wednesday afternoon.

Azib Khan (a Morgans Financial bank analyst) stated, “CBA has not been priced to perfection. Trading on a significant premium relative its peers and this trading update shows me that the extent that that premium cannot be justified.”

“What are we seeing? A correction to this premium. This should happen.”

CBA has not disclosed details on its net interest margin. Morgans estimates it dropped by around 14 basis points during the quarter. Citigroup It was estimated to be in the “low 1.90s”, a decrease of 2.04% from June.

The “Big Four” CBA peers are National Australia Bank (OTC), Westpac Banking (NYSE:) Corp as well Australia and New Zealand Banking Group – both have indicated in recent weeks that increased competition would continue to place pressure on margins. Shares of the trio fell between 1.3% – 1.9% on Wednesday.

Andrew Lyons, a Goldman Sachs bank analyst (NYSE:), stated that today’s trading update shows that CBA’s solid franchise is not exempt from elevated margin pressures. This appears to have been particularly impacting retail banks.” In a client note.

CBA reported a cash profit of A$2.20 Billion ($1.60 Billion) for the three-months ended Sept. 30, up from A$1.80Billion last year.

The volume of home loan sales rose by 7% in 2013, equivalent to an average of 1.2 times the growth in overall banking systems, despite continued demand for fixed rate loans.

The increase in business lending was driven by improved confidence that the economy is on its way to full recovery. Comparatively, system business credit growth in September was 4.6%.

Hugh Dive (NYSE:) Funds Management Chief Investor Officer said the drop in shares was due to “overreaction” by the market. The pressure on NIMs stories is not surprising, as well as the fact that this quarterly update is unaudited, which can be accompanied with lots of noise. It’s not like I am tearing up my hair.

($1 = 1.3701 Australian dollars)