By Sameer Manekar

(Reuters) -Commonwealth Bank of Australia warned on Wednesday that the lagged effect of high interest rates will continue to exert financial strain on households and businesses, as its first-half profit dropped due to tighter margins.

The bank, whose profit still beat expectations, warned that risks to the Australian economy were building as slowing demand and persistent inflation impacted businesses, with geopolitical tensions adding to the uncertainty.

"As cash rate increases have a lagged impact on households and business customers, we expect financial strain to continue in 2024, with an uptick in our arrears and impairments," CEO Matt Comyn said in a statement.

For the six months ending Dec. 31, Australia's top lender's cash profit fell to A$5.02 billion ($3.24 billion) from A$5.18 billion a year ago as intense mortgage competition, and higher expenses due to inflation, squeezed margins.

"Our lower cash profit reflects cost inflation and a competitive operating environment," Comyn added. "Australian households continue to feel pressure in the current environment, with many cutting back to adjust."

Despite that, the cash profit came in above a Visible Alpha consensus of A$4.95 billion.

Comyn said increases in the cost of living have been felt by more and more households and businesses and as a consequence, customers have reduced their spending to manage these pressures.

CBA's net interest income from continuing operations on cash basis slipped 2% to A$11.40 billion as its net interest margin (NIM) - a measure of profitability - declined 11 basis points to 1.99%.

"Consensus NIM of 1.98% for the full year might nudge down – so expect the stock might trade down 1-2% today given the overnight lead and potential small earnings per share downgrade," Stuart Archibald, managing director of Institutional Equities at Jarden, said in a note.

The bank's common equity tier 1 capital ratio stood at 12.3% as at December-end, slightly above 12.2% as at June-end. It declared an interim dividend of A$2.15 per share, up from A$2.10 last year.



Home loan repayments late for more than 90 days crept up from the prior six months owing to higher interest rates and inflation, although they remained low relative to historical averages, the bank said.

Meanwhile, CBA's shares have jumped more than 20% since November, outshining a 12% rise in the wider market, on the back of investors fleeing China's battered markets and those switching to equities on expectations of interest rate cuts.

($1 = 1.5504 Australian dollars)

(Reporting by Sameer Manekar and Roushni Nair in Bengaluru; Editing by Marguerita Choy and Stephen Coates)