Generally speaking, these past few bank results have not shown not a lot of NIM leverage.

Rates only recently went up, so NIM impacts are more a next quarter or next half story.

That said, more or less all this (the below NIM bridge, showing NIM compression by driver over the past half) should unwind over the next six months, assuming BDDs behave.

For example, from management commentary we already know the higher proportion of lower margin fixed rate loans, the swap rates (costs to the bank) repricing quicker than mortgage rates (the assets to the bank), and the deposit mix and pricing are somewhat in reverse, at the moment, with more variable loans being written, swap rates peaking, deposits not going up by as much as new loan rates.

Indeed, you could imagine +5bps NIM expansion each quarter over the next year, as those headwinds turn to tailwinds, assuming the economy doesn’t tank under the weight of higher rates.

That last line about the economy really is everything, however. Banks are a leveraged play on the economic cycle, and whilst we’ve all often said, “BDDs can’t get any lower”, surely after today’s negative loan impairment expense print this is true.

Lastly, the punchline. Nothing in the CBA result should or can account for such a large premium to peers, both domestic and international, in our mind.

We have a modest sectoral underweight, mindful of the possible strong rates leverage, and would use (ideally) bank strength to rotate into other names with better prospective returns. However, we are quite convinced that CBA is overvalued and hence don’t have any.

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