---
endpoint: analytics
pattern: Financial Services
status: done
latency_ms: 177228
conversation_id: 8d45efb1-6b96-478e-97f2-83a4e1ea3c58
citations: 14
created: 2026-05-31 20:40:38Z
---

# What are the key risks to CBA’s growth trajectory?

# Key Risks to CBA's Growth Trajectory

Based on CLSA's most recent coverage of Commonwealth Bank of Australia (CBA AU), the lead Australian banks analyst rates CBA **Underperform** with TP A$143, citing a soft earnings outlook and stretched valuation. The risks below are drawn from CLSA's May 2025 3Q25 trading-update review, the February 2025 1H25 result note, and three Australian Banks sector pieces (Nov-2024, Apr-2025 and Jun-2025).

## 1. Margin (NIM) compression — the single largest growth headwind

- **Replicating-portfolio and equity-hedge tailwinds are rolling off.** Returns on CBA's replicating portfolio and equity hedge are sensitive to **3-year and 5-year swap rates, which have fallen materially in recent months**. The drag will become more evident in **FY26 and beyond** as reinvestment yields step down [4].
- **Deposit competition** subtracted ~4bps in 1H25, with **falling cash rate, falling swap rates and increasing basis risk** all flagged as forward headwinds. Wholesale spreads are tight, which could fuel further deposit competition if conditions change. CLSA models a **‑1.5bp NIM decline in 2H25 and ‑2bps in 1H26** [2].
- **Divisional margin pressure already showing up** — Retail Banking margin fell from 2.50% to 2.49% on increased competition and unfavourable deposit mix; Business Bank margin fell from 3.37% to 3.36% on lower lending margins and higher funding costs [6].
- **Rate-cut sensitivity**: CBA has previously guided that a 25bps cash rate cut has roughly a **4bps NIM impact** (including the replicating portfolio) — materially more than NAB's ~1bp guide — making CBA among the most exposed to an RBA cutting cycle [11].

## 2. Asset-quality / credit-cycle risk

- **Loan losses set to normalize upward** from currently low levels. CLSA's forecasts show CBA's **Gross NPLs/total loans rising from 0.8% in FY24 → 0.9% / 1.0% / 1.1% in FY25/26/27**, with provision expense growing **+58.5% in FY26** off a low base.
- **Procyclical capital and provisioning risk** — falling Australian house prices feed back into forward-looking provisioning models, and "as house prices have started to fall… economic scenarios need to be adjusted down, this will present a headwind to provisioning and a potential greater loss in event of default for the banks" [13].
- **Recession is the explicit downside risk**: CLSA's investment-risk box for CBA reads: "margin pressure increasing, elevated loans losses or, worse, a **recession creating pressure on the dividends**" [1].

## 3. Soft earnings outlook with tailwinds easing

- CLSA's 3Q25 review: "**While we see solid underlying trends, tailwinds are easing on the replicating portfolio and banks including CBA face headwinds from potential rate cuts**" [4].
- Earnings model: **Net profit growth slows to (0.8)%–2.0% across FY26–FY27**, with **adjusted EPS down 1.7% in FY25** and roughly flat thereafter — i.e. essentially no organic earnings growth in the forecast horizon.

## 4. Credit-growth slowdown risk

- CBA's mortgage book grew **+3.2% hoh in 1H25 (system +2.7%)**, with management forecasting 4.5–6.5% housing credit growth in CY25/26. CLSA: "We anticipate credit growth to remain somewhat elevated, **there may however be risk around this if the economy slows quicker than expected and house prices continue to fall**" [3].
- Rate cuts themselves "**potentially slowing credit growth and increasing (at least perceived) risk to loan losses**" [10].

## 5. Cost growth eating operating leverage

- 1H25 expenses were elevated, with **CBA seeing headwinds from inflation and investment in technology & frontline** [7]. CLSA forecasts FY25 cost growth of **~6%**, outpacing 4.2% revenue growth, so the **cost/income ratio drifts from 43.7% (FY23) → 45.3% / 45.7% / 46.0% (FY25–27)**.

## 6. Capital management — less buyback fuel than peers

- CET1 of **11.9% (Mar-25)** is above the >11% post-dividend target, but CBA's current A$1bn buyback has only **A$0.3bn executed** vs A$0.7bn remaining — the smallest buyback in the major-bank peer group, leaving less capital-return optionality to support EPS.
- Sector-wide, the **additional 25bp AT1 capital requirement (effective 1 Jan 2027) following hybrid changes** narrows the scope for buybacks in an uncertain environment [10].
- CET1 ratios across the majors have **fallen sharply** in 1Q25, raising questions over whether **further buybacks can continue with payout ratios of 70–80% and loan losses likely to increase** [14].

## 7. Valuation — limited upside, large potential de-rating

- CBA trades at **~29.1x forward PE vs peer average ~15.7x** (excl. CBA) — a stretched premium [12]. CLSA explicitly says they "find it difficult to see substantial upside in CBA with the relative valuation premium stretched" [12].
- Book multiple is also extreme — **3.7x P/B** at the time of the February note [5].
- CLSA's investment thesis: "*With rate cuts on the horizon, we see more headwinds coming for CBA and the sector. Given the strong share price and potential headwind on the horizon, we rate CBA Underperform*" [5].

## 8. Rotation risk — the biggest non-fundamental risk

- The sector "**tail risk of rotation towards resources**" is repeatedly flagged. CLSA expects **China to keep stimulating, benefiting the resource sector**, and notes a structural rotation OUT of expensive defensive banks INTO miners would disproportionately hurt CBA given its premium valuation and high index/super-fund passive ownership [8][9].
- CLSA: "A bigger risk remains around rotation into resources although that is not our base case scenario" [5].
- Once rate-cut cycles begin, "**banks have historically underperformed the market**" on a 3-month view post-first-cut [9].

## 9. Political / regulatory pressure

- The federal election (due by May 2025) was flagged as likely to "**add some political pressure on the banks**" [9] — a recurring sensitivity for CBA given its market-share dominance and scrutiny on mortgage pricing.

---

## Risk Summary Matrix

| Risk Bucket | Direction | Magnitude / Quantification |
|---|---|---|
| NIM compression (rate cuts + deposit competition) | Negative | -1.5bp 2H25, -2bps 1H26; replicating-portfolio tailwind ending FY26+ |
| Replicating-portfolio/equity-hedge roll-off | Negative | Driven by 3yr/5yr swap-rate decline |
| Loan-loss normalization | Negative | NPL ratio 0.8% → 1.1% by FY27; provision growth +58.5% FY26 |
| Recession scenario | Tail risk | Threatens dividend |
| Credit-growth slowdown | Negative | Housing growth assumption faces downside if economy weakens |
| Cost growth | Negative | ~6% FY25 cost growth vs 4.2% revenue; C/I ratio drifting up |
| Buyback capacity | Negative | Only A$0.3bn executed of A$1bn; 25bp AT1 add coming Jan-2027 |
| Valuation de-rating | High | 29.1x fwd PE vs peers 15.7x; 3.7x P/B |
| Rotation into resources | Tail risk | China stimulus; historical post-cut bank underperformance |
| Political/regulatory | Negative | Election cycle adds pressure |

## Bottom Line

CLSA's house view is that CBA's underlying franchise (highest ROE, best technology, peer-leading provisioning) remains intact, but the growth trajectory is constrained by **NIM tailwinds rolling off into FY26**, **modest cost-growth pressure**, **normalizing loan losses**, and an **extreme valuation premium that leaves little margin for error** [12]. The "soft earnings outlook" plus "potential headwind on the horizon" is why CLSA moved the rating from Hold → Underperform in February 2025 and reiterated it through the 3Q25 update [5].

---
**Sources**
[1] CBA - U-PF (Continues to deliver but soft outlook) — CLSA (14 May 2025) — 607959409LinqAlpha.PDF
[2] CBA - U-PF (Solid but headwinds to increase) — CLSA (12 Feb 2025) — 607950441LinqAlpha.PDF
[3] CBA - U-PF (Solid but headwinds to increase) — CLSA (12 Feb 2025) — 607950441LinqAlpha.PDF
[4] CBA - U-PF (Continues to deliver but soft outlook) — CLSA (14 May 2025) — 607959409LinqAlpha.PDF
[5] CBA - U-PF (Solid but headwinds to increase) — CLSA (12 Feb 2025) — 607950441LinqAlpha.PDF
[6] CBA - U-PF (Solid but headwinds to increase) — CLSA (12 Feb 2025) — 607950441LinqAlpha.PDF
[7] CBA - U-PF (Solid but headwinds to increase) — CLSA (12 Feb 2025) — 607950441LinqAlpha.PDF
[8] Australian banks (ANZ the one to watch) — CLSA (20 Jun 2025) — 607962478LinqAlpha.PDF
[9] Australian Banks (2025 outlook: Winds of change) — CLSA (19 Nov 2024) — 607944740LinqAlpha.PDF
[10] Australian Banks (Rates falling, challenges rising) — CLSA (29 Apr 2025) — 607957469LinqAlpha.PDF
[11] Australian Banks (Rates falling, challenges rising) — CLSA (29 Apr 2025) — 607957469LinqAlpha.PDF
[12] Australian banks (ANZ the one to watch) — CLSA (20 Jun 2025) — 607962478LinqAlpha.PDF
[13] Australian Banks (2025 outlook: Winds of change) — CLSA (19 Nov 2024) — 607944740LinqAlpha.PDF
[14] Australian Banks (Rates falling, challenges rising) — CLSA (29 Apr 2025) — 607957469LinqAlpha.PDF

## Citations

- [1] **607959409LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607959409LinqAlpha.PDF>
- [2] **607950441LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/02/607950441LinqAlpha.PDF>
- [3] **607950441LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/02/607950441LinqAlpha.PDF>
- [4] **607959409LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607959409LinqAlpha.PDF>
- [5] **607950441LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/02/607950441LinqAlpha.PDF>
- [6] **607950441LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/02/607950441LinqAlpha.PDF>
- [7] **607950441LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/02/607950441LinqAlpha.PDF>
- [8] **607962478LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/06/607962478LinqAlpha.PDF>
- [9] **607944740LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2024/11/607944740LinqAlpha.PDF>
- [10] **607957469LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/04/607957469LinqAlpha.PDF>
- [11] **607957469LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/04/607957469LinqAlpha.PDF>
- [12] **607962478LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/06/607962478LinqAlpha.PDF>
- [13] **607944740LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2024/11/607944740LinqAlpha.PDF>
- [14] **607957469LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/04/607957469LinqAlpha.PDF>

