Could CBA’s clever growth strategy come back to bite?

With only a week and a bit before Commonwealth Bank delivers its December half profit – and kicks off the February reporting season proper – it’s time to play the Australian market’s favourite game: how to justify CBA’s valuation, which is the highest in the history of developed market banking.

There are plenty of interesting threads to this debate, from the role that passive and superannuation fund flows have played in the last 12 months, to the state of mortgage market competition (which is starting to heat up again, according to Macquarie) and the battle for banking deposits and loans.

Another key battleground is the size and strength of CBA’s customer base, which is easily the biggest in the country – more than 35 per cent of Australians call their main financial institution (MFI).

Retaining a leading MFI share is central to CEO Matt Somyn: better engagement with more customers drives scale, efficiency and better risk management, more product sales and better margins, which generates better profits, better returns to investors, a higher share price and a bigger war chest to invest in driving customer growth and engagement, particularly through spending on technology.

It’s a brilliant strategy. And while there isn’t an analyst in Australia that can explain why CBA shares trade at such a premium to their rivals, there is unanimous agreement CBA does deserve to trade at some sort of premium.

In the last year, Comyn has further grown MFI share by targeting a new group of customers: migrants pouring into the country in the wake of the COVID border lockdowns. Last August, CBA revealed it had attracted a staggering 62 per cent of new migrants to the bank, which Barrenjoey analyst and veteran bank watcher Jonathan Mott says was extremely impressive.

“With 667,000 migrants arriving in Australia during the 2024 financial year, CBA acquired approximately 405,000 new customers. Subtracting departures, we estimate CBA acquired about 305,000 net migrant customers last year.”

But Mott has dug a little deeper into the numbers. Given 69 per cent of those net migrants were aged between 15 and 34 – no surprise, given the heavy skew to students – Barrenjoey estimates over the past two years, “migrants accounted for the entire growth in CBA’s youth and young adult customer base”.

Now, Mott is clear: this is great business to win. Student visa holders are required to meet financial capacity requirements, including living expenses, 12 months of course fees and travel costs (which Mott estimates adds up to about $50,000), typically deposited into an Australian bank.

“Given CBA’s migrant share, this equates to about $15 billion in retail deposits in 2024, or about 68 per cent of its retail deposit growth. As an extra kicker, these deposits are non-interest earning, boosting CBA’s net interest income by about $300 million and its group net interest margin by 3 basis points.”

But this growth still leaves Mott with nagging questions. With migration numbers coming down, will the margin sugar hit fade? “While the migrant market is extremely profitable, is it masking pressures within its underlying retail franchise, especially with young non-migrant Australians?” he asks.

Sources inside CBA suggest Mott has made a few assumptions that might overstate the size of its migrant success, and any issues with attracting non-migrant youngsters. For example, the pool of migrants CBA is fishing in is quite a bit smaller when you exclude temporary visa holders, and student migrants’ financial capacity requirements are often satisfied with a letter from their parents, and/or with much less than $50,000.

It’s also worth pointing out CBA’s MFI share of those aged between 18 to 24 is sitting above 45 per cent, with the nearest rival at just 14 per cent.

Still, the broader issue of how to attract and retain younger customers is resonating inside CBA. It’s understood Comyn has made it clear internally there is no room for complacency on either attracting and retaining younger customers, or advocating on the issue of housing affordability. The hundreds of millions CBA is pouring into tech spending, particularly around its market-leading app, is a key line of defence.

Mott also argues that CBA – and frankly, most of its rivals – are turning away from younger customers in other ways. Surging house prices and higher interest rates have crushed housing affordability, meaning CBA’s home loans are increasingly skewed to older, wealthier households. Since the first half of the 2022 financial year – that is, before rates started rising – owner-occupier loans to households earning less than $125,000 have plunged 70 per cent, while loans to those households earning above $500,000 are up 13 per cent.

Again, Mott can’t fault CBA. Selling more loans to richer households makes sense from the point of view of margin and return on equity but he asks “is this consistent with its longer-term strategy of keeping customers through their banking lifecycle?”

In recent results, CBA has done a great job providing data on how different age groups are faring. Next week will no doubt provide a fresh update.